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Operational Risk: A Guide to Basel II Capital Requirements, Models, and Analysis

Book Description

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.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Preface
  5. About the Authors
  6. CHAPTER 1 - Operational Risk Is Not Just “Other” Risks
    1. EFFECTS OF GLOBALIZATION AND DEREGULATION: INCREASED RISK EXPOSURES
    2. EXAMPLES OF HIGH-MAGNITUDE OPERATIONAL LOSSES
    3. OPERATIONAL LOSSES IN THE HEDGE FUND INDUSTRY
    4. SUMMARY OF KEY CONCEPTS
    5. REFERENCES
  7. CHAPTER 2 - Operational Risk: Definition, Classification, and Its Place among Other Risks
    1. WHAT IS RISK?
    2. DEFINITION OF OPERATIONAL RISK
    3. OPERATIONAL RISK EXPOSURE INDICATORS
    4. CLASSIFICATION OF OPERATIONAL RISK
    5. TOPOLOGY OF FINANCIAL RISKS
    6. CAPITAL ALLOCATION FOR OPERATIONAL, MARKET, AND CREDIT RISKS
    7. IMPACT OF OPERATIONAL RISK ON THE MARKET VALUE OF BANK EQUITY
    8. EFFECTS OF MACROECONOMIC ENVIRONMENT ON OPERATIONAL RISK
    9. SUMMARY OF KEY CONCEPTS
    10. REFERENCES
  8. CHAPTER 3 - Basel II Capital Accord
    1. THE BASEL COMMITTEE ON BANKING SUPERVISION
    2. THE BASEL CAPITAL ACCORD
    3. PILLAR I: MINIMUM CAPITAL REQUIREMENTS FOR OPERATIONAL RISK
    4. PILLAR II: CAPITAL ADEQUACY AND REGULATORY PRINCIPLES
    5. PILLAR III: MARKET DISCIPLINE AND PUBLIC DISCLOSURE
    6. OVERVIEW OF LOSS DATA COLLECTION EXERCISES
    7. THE ROLE OF INSURANCE
    8. COMPLIANCE WITH BASEL II IN PRACTICE
    9. IMPLEMENTING BASEL II: SOME GENERAL CONCERNS
    10. SUMMARY OF KEY CONCEPTS
    11. REFERENCES
  9. CHAPTER 4 - Key Challenges in Modeling Operational Risk
    1. OPERATIONAL RISK MODELS
    2. SPECIFICS OF OPERATIONAL LOSS DATA
    3. SUMMARY OF KEY CONCEPTS
    4. REFERENCES
  10. CHAPTER 5 - Frequency Distributions
    1. BINOMIAL DISTRIBUTION
    2. GEOMETRIC DISTRIBUTION
    3. POISSON DISTRIBUTION
    4. NEGATIVE BINOMIAL DISTRIBUTION
    5. NONHOMOGENEOUS POISSON PROCESS (COX PROCESS)
    6. ALTERNATIVE APPROACH: INTERARRIVAL TIMES DISTRIBUTION
    7. EMPIRICAL ANALYSIS WITH OPERATIONAL LOSS DATA
    8. SUMMARY OF KEY CONCEPTS
    9. APPENDIX: BASIC DESCRIPTIVE TECHNIQUES FOR DISCRETE RANDOM VARIABLES
    10. REFERENCES
  11. CHAPTER 6 - Loss Distributions
    1. NONPARAMETRIC APPROACH: EMPIRICAL DISTRIBUTION FUNCTION
    2. PARAMETRIC APPROACH: CONTINUOUS LOSS DISTRIBUTIONS
    3. EXTENSION: MIXTURE LOSS DISTRIBUTIONS
    4. A NOTE ON THE TAIL BEHAVIOR
    5. EMPIRICAL EVIDENCE WITH OPERATIONAL LOSS DATA
    6. SUMMARY OF KEY CONCEPTS
    7. APPENDIX: BASIC DESCRIPTIVE TECHNIQUES FOR CONTINUOUS RANDOM VARIABLES
    8. REFERENCES
  12. CHAPTER 7 - Alpha-Stable Distributions
    1. DEFINITION OF AN ALPHA-STABLE RANDOM VARIABLE
    2. USEFUL PROPERTIES OF AN ALPHA-STABLE RANDOM VARIABLE
    3. ESTIMATING PARAMETERS OF THE ALPHA-STABLE DISTRIBUTION
    4. USEFUL TRANSFORMATIONS OF ALPHA-STABLE RANDOM VARIABLES
    5. APPLICATIONS TO OPERATIONAL LOSS DATA
    6. SUMMARY OF KEY CONCEPTS
    7. APPENDIX: CHARACTERISTIC FUNCTIONS
    8. REFERENCES
  13. CHAPTER 8 - Extreme Value Theory
    1. BLOCK MAXIMA MODEL
    2. PEAK OVER THRESHOLD MODEL
    3. ESTIMATING THE SHAPE PARAMETER
    4. ADVANTAGES AND LIMITATIONS OF EXTREME VALUE THEORY
    5. EMPIRICAL STUDIES WITH OPERATIONAL LOSS DATA
    6. SUMMARY OF KEY CONCEPTS
    7. REFERENCES
  14. CHAPTER 9 - Truncated Distributions
    1. REPORTING BIAS PROBLEM
    2. TRUNCATED MODEL FOR OPERATIONAL RISK
    3. EMPIRICAL STUDIES WITH OPERATIONAL LOSS DATA
    4. SUMMARY OF KEY CONCEPTS
    5. REFERENCES
  15. CHAPTER 10 - Testing for the Goodness of Fit
    1. VISUAL TESTS FOR THE GOODNESS OF FIT
    2. COMMON FORMAL TESTS FOR THE GOODNESS OF FIT
    3. EMPIRICAL STUDY WITH OPERATIONAL LOSS DATA
    4. SUMMARY OF KEY CONCEPTS
    5. APPENDIX: HYPOTHESIS TESTING
    6. REFERENCES
  16. CHAPTER 11 - Value-at-Risk
    1. INTUITIVELY, WHAT IS VaR?
    2. COMPOUND OPERATIONAL LOSS MODELS AND DERIVATION OF OPERATIONAL VaR
    3. VaR SENSITIVITY ANALYSIS
    4. BACKTESTING VaR
    5. BENEFITS AND LIMITATIONS OF VaR AND ALTERNATIVE RISK MEASURES
    6. EMPIRICAL STUDIES WITH OPERATIONAL LOSS DATA
    7. SUMMARY OF KEY CONCEPTS
    8. REFERENCES
  17. CHAPTER 12 - Robust Modeling
    1. OUTLIERS IN OPERATIONAL LOSS DATA
    2. SOME DANGERS OF USING THE CLASSICAL APPROACH
    3. OVERVIEW OF ROBUST STATISTICS METHODOLOGY
    4. APPLICATION OF ROBUST METHODS TO OPERATIONAL LOSS DATA
    5. SUMMARY OF KEY CONCEPTS
    6. REFERENCES
  18. CHAPTER 13 - Modeling Dependence
    1. THREE TYPES OF DEPENDENCE IN OPERATIONAL RISK
    2. LINEAR CORRELATION
    3. ALTERNATIVE DEPENDENCE MEASURE: RANK CORRELATION
    4. COPULAS
    5. USING COPULAS TO AGGREGATE CREDIT, MARKET, AND OPERATIONAL RISKS
    6. EMPIRICAL STUDIES WITH OPERATIONAL LOSS DATA
    7. SUMMARY OF KEY CONCEPTS
    8. REFERENCES
  19. Index