A Dynamical Model for Forecasting Operational Losses

Physica A, Vol. 391, No. 8, pp. 2641-2655, 2012

30 Pages Posted: 23 Jan 2011 Last revised: 2 Jun 2020

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: January 4, 2011

Abstract

A novel dynamical model for the study of operational risk in banks and suitable for the calculation of the Value at Risk (VaR) is proposed. The equation of motion takes into account the interactions among different bank's processes, the spontaneous generation of losses via a noise term and the efforts made by the bank to avoid their occurrence. Since the model is very general, it can be tailored on the internal organizational structure of a specific bank by estimating some of its parameters from historical operational losses. The model is exactly solved in the case in which there are no causal loops in the matrix of couplings and it is shown how the solution can be exploited to estimate also the parameters of the noise. The forecasting power of the model is investigated by using a fraction f of simulated data to estimate the parameters, showing that for f = 0.75 the VaR can be forecast with an error of order 10^-3.

Keywords: Operational Risk, Dynamical Systems, Value at Risk, Capital Allocation

Suggested Citation

Bardoscia, Marco and Bellotti, Roberto, A Dynamical Model for Forecasting Operational Losses (January 4, 2011). Physica A, Vol. 391, No. 8, pp. 2641-2655, 2012, Available at SSRN: https://ssrn.com/abstract=1745368 or http://dx.doi.org/10.2139/ssrn.1745368

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

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