Date of this Version
Journal of Risk and Insurance
At large financial institutions, operational risk is gaining the same importance as market and credit risk in the capital calculation. Although scenario analysis is an important tool for financial risk measurement, its use in the measurement of operational risk capital has been arbitrary and often inaccurate. We propose a method that combines scenario analysis with historical loss data. Using the Change of Measure approach, we evaluate the impact of each scenario on the total estimate of operational risk capital. The method can be used in stress-testing, what-if assessment for scenario analysis, and Loss Given Default estimates used in credit evaluations.
This is the peer reviewed version of the following article: Dutta, K. K. and Babbel, D. F. (2014), Scenario Analysis in the Measurement of Operational Risk Capital: A Change of Measure Approach. Journal Risk and Insurance, 81: 303–334. doi:10.1111/j.1539-6975.2012.01506.x, which has been published in final form at http://dx.doi.org/10.1111/j.1539-6975.2012.01506.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms
Dutta, K., & Babbel, D. F. (2014). Scenario Analysis in the Measurement of Operational Risk Capital: A Change of Measure Approach. Journal of Risk and Insurance, 81 (2), 303-334. http://dx.doi.org/10.1111/j.1539-6975.2012.01506.x/abstract
Date Posted: 27 November 2017
This document has been peer reviewed.