Chief Risk Officer, Aviva
Welcome to the third issue of the third year of The Journal of Operational Risk. I hope you have enjoyed this hot summer season as we move quickly into the fall. In the last issue I had mentioned in my letter that it looked like the credit crunch crisis and its impact in the financial markets were starting to subside after a year. This was due to some mild recovery in the financial markets in May. It is clear now that this optimism was hasty.
Dark clouds are still hanging overhead and most economic analysts and risk managers these days share the view that the economic environment will get worse before it gets better. This has been a particularly difficult year for Wall Street with massive layoffs across the board and many of its most prestigious firms struggling in such a dismal environment. In conversation with readers of the Journal and industry peers across the globe we may, at least, take comfort in the fact that this current situation has been teaching us quite a few lessons that we will certainly use in the future.
Regarding the state of operational risk research, I am very happy to see a growing flow of high-quality papers. It looks like a recent number of researchers worldwide are changing their focus to operational risk and this can only help us move up to a greater stage. I would also like to re-emphasize that the Journal is not just for academics to publish in. We at The Journal of Operational Risk encourage readers to submit papers to the ‘Forum’ section. This section is aimed at a discussion of current events with less concern for the technical aspect, formulas and mathematics. We at the Journal will be extremely happy to see more submissions with more practical, current views of relevant matters that affect your day-to-day activities.
In this issue we bring you three papers in the research section and one paper in the forum section.
In the first paper, Giacometti et al write about their research on “Aggregation issues in operational risk”. As I have commented in my previous letter, the study of copulas is becoming more popular by the day in the operational risk community. The use of copulas helps to include correlation into an operational risk measurement framework. In this paper the authors use copulas to aggregate operational risk capital in a bank by comparing value-at-risk (VaR) and conditional VaR estimates with those obtained under the full correlation assumption. Their results demonstrate a significant reduction in capital when a t-copula is employed.
In the following paper, “A mixing model for operational risk”, Gustafsson and Nielsen claim that external data can be useful to improve parameter estimation. They develop a systematic approach that helps to mix internal and external data.
In the final paper for the research section, “Operational risk and insurance: a ruin probabilistic reserving approach”, Kaishev et al propose actuarial techniques to operational risk capital measurement. Using their methodology the capital estimation exercise could be viewed not as a one-off exercise, performed at a particular moment of time, but as dynamic reserving, following a certain risk capital accumulation function.
Operational Risk Forum
In the forum section, Folpmers provides the viewers with a very useful exercise in copulas in his article “A practical guide to measuring operational risk using subjective data through copulas and scenario analysis”. Folpmers uses subjective data in this exercise, which could be useful for those firms who focus on this particular type of data collection.
A practical guide to measure operational risk using subjective data through copulas and scenario analysis