A Review of the State of the Art in Quantifying Operational Risk

42 Pages Posted: 10 Dec 2018

See all articles by Sonia Muela

Sonia Muela

Universidad Nacional de Educacion a Distancia (UNED) - Faculty of Economics and Business Administration

Carmen Lopez-Martin

Universidad Nacional de Educacion a Distancia (UNED) - Faculty of Economics and Business Administration

Date Written: December 7, 2018

Abstract

In this paper, we provide a comprehensive review of the different approaches developed to model operational risk, specifically focusing on the actuarial approach. We highlight their relative strengths and weaknesses. In the case of the actuarial approach – that most commonly used by financial institutions – we review the challenges faced (scarcity of data, truncated data, and modeling dependence in both frequency and severity) and offer proposals to overcome them. Our paper’s objective is to provide financial risk researchers with all of the models and proposed developments for operational risk estimation.

Keywords: operational risk, risk management, financial regulation, fat tails, extreme tail behavior, value-at-risk (VaR).

Suggested Citation

Muela, Sonia and Lopez-Martin, Carmen, A Review of the State of the Art in Quantifying Operational Risk (December 7, 2018). Journal of Operational Risk, Vol. 13, No. 4, 2018. Available at SSRN: https://ssrn.com/abstract=3296281

Sonia Muela (Contact Author)

Universidad Nacional de Educacion a Distancia (UNED) - Faculty of Economics and Business Administration ( email )

Spain

Carmen Lopez-Martin

Universidad Nacional de Educacion a Distancia (UNED) - Faculty of Economics and Business Administration ( email )

Spain

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