A dynamical model for forecasting operational losses

Marco Bardoscia and R. Bellotti

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 8, 2641-2655

Abstract: A novel dynamical model for the study of operational risk in banks and suitable for the calculation of the Value at Risk (VaR) is proposed. The equation of motion takes into account the interactions among different bank’s processes, the spontaneous generation of losses via a noise term and the efforts made by the bank to avoid their occurrence. Since the model is very general, it can be tailored on the internal organizational structure of a specific bank by estimating some of its parameters from historical operational losses. The model is exactly solved in the case in which there are no causal loops in the matrix of couplings and it is shown how the solution can be exploited to estimate also the parameters of the noise. The forecasting power of the model is investigated by using a fraction f of simulated data to estimate the parameters, showing that for f=0.75 the VaR can be forecast with an error ≃10−3.

Keywords: Operational Risk; Dynamical Systems; Value at Risk; Capital allocation (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: A Dynamical Model for Forecasting Operational Losses (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:8:p:2641-2655

DOI: 10.1016/j.physa.2011.12.046

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