Cyclicality in Catastrophic and Operational Risk Measurements
City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
NYU Working Paper No. FIN-04-019
Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2003. We find evidence of cyclical components in both the catastrophic andoperational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately 18% of financial institutions returns represent compensation for operational risk. However,depository institutions are exposed to operational risk levels that average 39% of the overall equity risk premium. Moreover, operational risk events are more likely to be the cause of large unexpected catastrophiclosses, although when they occur, the losses are smaller than those resulting from a combination of market risk, credit risk or other risk events.
Number of Pages in PDF File: 51
Keywords: operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution
Date posted: November 3, 2008
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.281 seconds