Shapley Allocation, Diversification and Services in Operational Risk

15 Pages Posted: 2 Mar 2018

See all articles by Peter Mitic

Peter Mitic

Santander Bank; Dept. of Computer Science, UCL

Bertrand Hassani

Université Paris I Panthéon-Sorbonne

Date Written: March 1, 2018

Abstract

In this paper, a method of allocating operational risk regulatory capital using a closed-form Shapley method, applicable to a large number of business units (BUs), is proposed. It is assumed that if BUs form coalitions, the value added to a coalition by a new entrant is a simple function of the value of that entrant. This function represents the diversification that can be achieved by combining operational risk losses. Two such functions are considered. The calculations account for a service that further reduces the capital payable by BUs. The results derived are applied to recent loss data.

Keywords: capital value, diversification, game theory, operational risk, service, Shapley.

Suggested Citation

Mitic, Peter and Hassani, Bertrand, Shapley Allocation, Diversification and Services in Operational Risk (March 1, 2018). Journal of Operational Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3132365

Peter Mitic (Contact Author)

Santander Bank ( email )

Ciudad Financiera
Edificio Amazonia
Boadilla del Monte, 28660
Spain

Dept. of Computer Science, UCL ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Bertrand Hassani

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

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