A Dynamical Approach to Operational Risk Measurement

The Journal of Operational Risk, Vol. 6, No. 1, pp. 3-19, 2011

19 Pages Posted: 31 Aug 2010 Last revised: 2 Mar 2011

See all articles by Marco Bardoscia

Marco Bardoscia

Bank of England

Roberto Bellotti

Università degli Studi di Bari “Aldo Moro” (UNIBA) - Department of Physics; Istituto Nazionale di Fisica Nucleare (INFN) - Sezione di Bari

Date Written: August 27, 2010

Abstract

We propose a dynamical model for the estimation of Operational Risk in banking institutions. Operational Risk is the risk that a financial loss occurs as the result of failed processes. Examples of operational losses are the ones generated by internal frauds, human errors or failed transactions. In order to encompass the most heterogeneous set of processes, in our approach the losses of each process are generated by the interplay among noise, interactions with other processes and the efforts the bank makes to avoid losses. We show how some relevant parameters of the model can be estimated from a database of historical operational losses, validate the estimation procedure and test the forecasting power of the model. Some advantages of our approach over the traditional statistical techniques are that it allows to follow the whole time evolution of the losses and to take into account different-time correlations among the processes.

Keywords: Operational Risk, Risk Management, Dynamical Models

Suggested Citation

Bardoscia, Marco and Bellotti, Roberto, A Dynamical Approach to Operational Risk Measurement (August 27, 2010). The Journal of Operational Risk, Vol. 6, No. 1, pp. 3-19, 2011, Available at SSRN: https://ssrn.com/abstract=1666860

Marco Bardoscia (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Roberto Bellotti

Università degli Studi di Bari “Aldo Moro” (UNIBA) - Department of Physics ( email )

Via Amendola 173
Bari, BA 70126
Italy

Istituto Nazionale di Fisica Nucleare (INFN) - Sezione di Bari

Via Amendola 173
Bari, BA 70126
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
288
Abstract Views
1,309
rank
117,442
PlumX Metrics