Functional Correlation Approach to Operational Risk in Banking Organizations
Statistical Mechanics
2009-11-07 v1 Disordered Systems and Neural Networks
Abstract
A Value-at-Risk based model is proposed to compute the adequate equity capital necessary to cover potential losses due to operational risks, such as human and system process failures, in banking organizations. Exploring the analogy to a lattice gas model from physics, correlations between sequential failures are modeled by as functionally defined, heterogeneous couplings between mutually supportive processes. In contrast to traditional risk models for market and credit risk, where correlations are described by the covariance of Gaussian processes, the dynamics of the model shows collective phenomena such as bursts and avalanches of process failures.
Keywords
Cite
@article{arxiv.cond-mat/0204368,
title = {Functional Correlation Approach to Operational Risk in Banking Organizations},
author = {Reimer Kuehn and Peter Neu},
journal= {arXiv preprint arXiv:cond-mat/0204368},
year = {2009}
}
Comments
12 pages, 7 figures, uses RevTeX 4.0, submitted to Phys. Rev. E