The Quantification of Operational Risk

Posted: 8 Nov 2005

See all articles by Paolo Vanini

Paolo Vanini

University of Basel

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

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Abstract

This paper develops a framework for the quantification of operational risk based on a network with functional dependencies that represent work flows for business activities. The functioning of each node depends on stochastic risk factors driven by inputs such as human resources, data and inputs from other nodes. Using analytical and numerical methods, we obtain answers concerning capital allocation, stability, risk figures, the effect of different network structures (called "topological diversification") and dynamic diversification. Interpreting the results shows that the usual intuition gained from market and credit risk does not apply to the quantification of operational risk.

Keywords: quantification of operational risk, functional dependencies, node, stochastic risk factors, analytical methocs, numerical methocs, capital allocation, stability, risk figures, network structured, topological diversification, dynamic diversification

Suggested Citation

Vanini, Paolo and Leippold, Markus, The Quantification of Operational Risk. Journal of Risk, Vol. 8, No. 1, Fall 2005. Available at SSRN: https://ssrn.com/abstract=839805

Paolo Vanini

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

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