While operational risk has long been regarded as a mere part of "other" risks--outside the realm of credit and market risk--it has quickly made its way to the forefront of finance. In fact, with implementation of the Basel II Capital Accord already underway, many financial professionals--as well as those preparing to enter this field--must now become familiar with a variety of issues related to operational risk modeling and management.
Written by the experienced team of Anna Chernobai, Svetlozar Rachev, and Frank Fabozzi, Operational Risk will introduce you to the key concepts associated with this discipline. Filled with in-depth insights, expert advice, and innovative research, this comprehensive guide not only presents you with an abundant amount of information regarding operational risk, but it also walks you through a wide array of examples that will solidify your understanding of the issues discussed.
Topics covered include:
- The main challenges that exist in modeling operational risk.
- The variety of approaches used to model operational losses.
- Value-at-Risk and its role in quantifying and managing operational risk.
- The three pillars of the Basel II Capital Accord.
- And much more.
Operational Risk: A Guide to Basel II Capital Requirements, Models, and Analysis| Anna S. Chernobai (Author), Svetlozar T. Rachev (Author), Frank J. Fabozzi (Author)| Wiley
Table of Contents
CHAPTER 1. Operational Risk Is Not Just “Other” Risks
Effects of globalization and deregulation: increased risk exposures, Examples of high-magnitude operational losses, Operational losses in the hedge fund industry, Summary of key concepts, References.
CHAPTER 2. Operational Risk: Definition, Classification, and Its Place among Other Risks
“What is risk?”, Definition of operational risk, Operational risk exposure indicators, Classification of operational risk, Topology of financial risks, Capital allocation for operational, market, and credit risks, Impact of operational risk on the market value of bank equity, Effects of macroeconomic environment on operational risk, Summary of key concepts, References.
CHAPTER 3. Basel II Capital Accord
The basel committee on banking supervision, The basel capital accord, Pillar i: minimum capital requirements for operational risk, Pillar ii: capital adequacy and regulatory principles, Pillar iii: market discipline and public disclosure, Overview of loss data collection exercises, The role of insurance, Compliance with basel ii in practice, Implementing basel ii: some general concerns, Summary of key concepts, References.
CHAPTER 4. Key Challenges in Modeling Operational Risk
Operational risk models, Specifics of operational loss data, Summary of key concepts, References.
CHAPTER 5. Frequency Distributions
Binomial distribution, Geometric distribution, Poisson distribution, Negative binomial distribution, Nonhomogeneous poisson process (cox process), Alternative approach: interarrival times distribution, Empirical analysis with operational loss data, Summary of key concepts, Appendix: basic descriptive techniques for discrete random variables, References.
CHAPTER 6. Loss Distributions
Nonparametric approach: empirical distribution function, Parametric approach: continuous loss distributions, Extension: mixture loss distributions, A note on the tail behavior, Empirical evidence with operational loss data, Summary of key concepts, Appendix: basic descriptive techniques for continuous random variables, References.
CHAPTER 7. Alpha-Stable Distributions
Definition of an alpha-stable random variable, Useful properties of an alpha-stable random variable, Estimating parameters of the alpha-stable distribution, Useful transformations of alpha-stable random variables, Applications to operational loss data, Summary of key concepts, Appendix: characteristic functions, References.
CHAPTER 8. Extreme Value Theory
Block maxima model, Peak over threshold model, Estimating the shape parameter, Advantages and limitations of extreme value theory, Empirical studies with operational loss data, Summary of key concepts, References.
CHAPTER 9. Truncated Distributions
Reporting bias problem, Truncated model for operational risk, Empirical studies with operational loss data, Summary of key concepts, References.
CHAPTER 10. Testing for the Goodness of Fit
Visual tests for the goodness of fit, Common formal tests for the goodness of fit, Empirical study with operational loss data, Summary of key concepts, Appendix: hypothesis testing, References.
CHAPTER 11. Value-at-Risk
Intuitively, “what is var?”, Compound operational loss models and derivation of operational var, Var sensitivity analysis, Backtesting var, Benefits and limitations of var and alternative risk measures, Empirical studies with operational loss data, Summary of key concepts, References.
CHAPTER 12. Robust Modeling
Outliers in operational loss data, Some dangers of using the classical approach, Overview of robust statistics methodology, Application of robust methods to operational loss data, Summary of key concepts, References.
CHAPTER 13. Modeling Dependence
Three types of dependence in operational risk, Linear correlation, Alternative dependence measure: rank correlation, Copulas, Using copulas to aggregate credit, market, and operational risks, Empirical studies with operational loss data, Summary of key concepts.
REFERENCES Index
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