Operational Risk and Equity Prices

43 Pages Posted: 21 Nov 2011 Last revised: 7 Sep 2018

See all articles by Michael Shafer

Michael Shafer

Providence College

Yildiray Yildirim

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

Date Written: November 10, 2012

Abstract

We use an empirical model to categorize firms into portfolios based on operational risk. Using these portfolios, we show that a strategy of buying firms in the highest decile of operational risk and shorting firms in the lowest decile of operational risk earned a positive but insignificant risk-adjusted average return of 0.72% per month from 1990 to 2000. However, from 2001 to 2010, the same strategy earned a significantly negative risk-adjusted average return of -1.50% per month. This change occurred during a time characterized by an increasing number of high profile operational losses and regulatory changes surrounding operational risk.

Keywords: Operational risk, stock prices, stock returns

JEL Classification: G10, G12, G30

Suggested Citation

Shafer, Michael and Yildirim, Yildiray, Operational Risk and Equity Prices (November 10, 2012). Available at SSRN: https://ssrn.com/abstract=1960245 or http://dx.doi.org/10.2139/ssrn.1960245

Michael Shafer (Contact Author)

Providence College ( email )

1 Cunningham Square
Providence, RI 02918
United States
401-865-1928 (Phone)

Yildiray Yildirim

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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