A Bayesian Networks Approach to Operational Risk
Physica A, Vol. 389, No. 8, pp. 1721-1728, 2010
Posted: 10 Sep 2010 Last revised: 8 Feb 2012
Date Written: 2009
A system for Operational Risk management based on the computational paradigm of Bayesian Networks is presented. The algorithm allows the construction of a Bayesian Network targeted for each bank and takes into account in a simple and realistic way the correlations among different processes of the bank. The internal losses are averaged over a variable time horizon, so that the correlations at different times are removed, while the correlations at the same time are kept: the averaged losses are thus suitable to perform the learning of the network topology and parameters; since the main aim is to understand the role of the correlations among the losses, the assessments of domain experts are not used. The algorithm has been validated on synthetic time series. It should be stressed that the proposed algorithm has been thought for the practical implementation in a mid or small sized bank, since it has a small impact on the organizational structure of a bank and requires an investment in human resources which is limited to the computational area.
Keywords: Operational Risk, Bayesian Networks, Time Series, Value at Risk, Different-Times Correlations
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