Quantitative Measures of Operational Risk: An Application to Funds Management

19 Pages Posted: 18 Mar 2012 Last revised: 26 May 2012

Stephen J. Brown

New York University - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2012

Abstract

Basel II defines operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes people or systems or from external events. In the past decade there have appeared a number of quantitative approaches to measuring this risk, approaches that abstract from market risk and reputational risk. The challenge is to develop operational risk measures in an asset management context where there is only limited information available about the incidence and severity of operational loss events. We survey different approaches to this problem and argue that managing this risk through operational due diligence is a source of alpha in this funds management context.

Keywords: Operational risk, AMA, operational due diligence, hedge funds

JEL Classification: G2, K2

Suggested Citation

Brown, Stephen J., Quantitative Measures of Operational Risk: An Application to Funds Management (May 21, 2012). Available at SSRN: https://ssrn.com/abstract=2025112 or http://dx.doi.org/10.2139/ssrn.2025112

Stephen J. Brown (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

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