We study the dynamic decision making of a financial institution in the presence of a novel implementation friction that gives rise to operational risk. We distinguish between internal and external operational risks depending on whether the institution has control over them. Internal operational risk naturally arises in the context of model risk, as the institution exposes itself to operational ...

a r t i c l e i n f o Operational risk is increasingly being recognised as a significant area of risk and regulation, yet there exists relatively little research on it. In this paper we show that operational risk represents a fundamental risk to option hedging and investigate it by proposing a new theoretical model. We derive an exposure indicator for the operational risk of option hedging and ...

Events such as those which occurred in Barings, Daiwa, and Sumitomo helped focus attention on an important type of risk which a bank runs, the operational risk (OR), which encompasses de®ciencies in information systems and internal controls, and includes legal and personnel events that could result in unexpected losses. This type of risk is closely associated with human error, system failure, f...

Operational risk is defined as a consequence of critical contingencies most of which are quantitative in nature and many questions regarding economic capital allocation for operational risk continue to be open. Existing quantitative models that compute the value at risk for market and credit risk do not take into account operational risk. They also make various assumptions about ’normality’ and...

In this paper we study copula-based models for aggregation of operational risk capital across business lines in a bank. A commonly used method of summation of the value-at-risk (VaR) measures, that relies on a hypothesis of full correlation of losses, becomes inappropriate in the presence of dependence between business lines and may lead to over-estimation of the capital charge. The problem can...

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In Böcker and Klüppelberg (2005) we presented a simple approximation of OpVaR of a single operational risk cell. The present paper derives approximations of similar quality and simplicity for the multivariate problem. Our approach is based on modelling of the dependence structure of different cells via the new concept of a Lévy copula. JEL Classifications: G18,G39.