Cyclicality in Catastrophic and Operational Risk Measurements
51 Pages Posted: 3 Nov 2008
There are 5 versions of this paper
Cyclicality in Catastrophic and Operational Risk Measurements
Cyclicality in Catastrophic and Operational Risk Measurements
Cyclicality in Catastrophic and Operational Risk Measurements
Cyclicality in Catastrophic and Operational Risk Measurements
Cyclicality in Catastrophic and Operational Risk Measurements
Date Written: September 2004
Abstract
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.
Keywords: operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution
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