Phase transitions in operational risk.

In this paper we explore the functional correlation approach to operational risk. We consider networks with heterogeneous a priori conditional and unconditional failure probability. In the limit of sparse connectivity, self-consistent expressions for the dynamical evolution of order parameters are obtained. Under equilibrium conditions, expressions for the stationary states are also obtained. Consequences of the analytical theory developed are analyzed using phase diagrams. We find coexistence of operational and nonoperational phases, much as in liquid-gas systems. Such systems are susceptible to discontinuous phase transitions from the operational to nonoperational phase via catastrophic breakdown. We find this feature to be robust against variation of the microscopic modeling assumptions.

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