The Dynamics of Operational Loss Clustering

30 Pages Posted: 7 Feb 2011

See all articles by Anna Chernobai

Anna Chernobai

Syracuse University - M. J. Whitman School of Management

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: June 20, 2008

Abstract

This paper investigates the characteristics of the operational loss data formation mechanism that takes place between the date of discovery of a new operational risk event and the final settlement date on which all losses are materialized. The first loss that characterizes the initial impact of a new operational risk event frequently triggers a sequence of related losses. Then, losses generated by the same event are not independent and follow a predictable scheme and the frequency of secondary losses is not homogeneous: both are functions of the initial loss amount and time. We model the arrival intensity and loss severities with a shot-noise stochastic process and derive its key properties. We then discuss implications of our model for the estimation of the regulatory capital charge for operational risk. In an empirical analysis, we find strong evidence of a shot-noise behavior in operational losses using the data of a major U.S. commercial bank.

Keywords: Operational risk, Basel II, shot noise, Cox process, aggregate los

JEL Classification: G10, G21, G32, C10, C16

Suggested Citation

Chernobai, Anna and Yildirim, Yildiray, The Dynamics of Operational Loss Clustering (June 20, 2008). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1755597

Anna Chernobai

Syracuse University - M. J. Whitman School of Management ( email )

721 University Ave
Syracuse, NY 13244-2450
United States
(315) 443 3357 (Phone)

HOME PAGE: http://https://sites.google.com/a/g.syr.edu/anna-chernobai/

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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