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
Date Written: August 27, 2010
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
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