Operational Risk [24]

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Bullet points include: Operational risk akin to ‘manufacturing processes’ that just happen to be operated by the firm. Operations Research has developed extensive set of tools that can be applied to such problems. E.g. ‘machine’ with a set of components, each subject to a risk of failure. Model time or duration until failure, tau, by supposing that it has a distribution F with density f. ‘Time to failure’ also important for credit risk. Difference is that with operational risk we may be able to influence our own processes, c.f. earlier illustrative models, whilst credit risks usually exogenous (except perhaps for intra-group or outsourcing exposures)

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