Cyclicality in Catastrophic and Operational Risk Measurements

51 Pages Posted: 3 Nov 2008  

Linda Allen

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

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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

Suggested Citation

Allen, Linda and Bali, Turan G., Cyclicality in Catastrophic and Operational Risk Measurements (September 2004). NYU Working Paper No. FIN-04-019. Available at SSRN: https://ssrn.com/abstract=1294454

Linda Allen

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

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