Operational Risk Models

In general terms, operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems or from external events. The models that have been proposed for assessing operational risk can be broadly classified into top-down models and bottom-up models. Top-down approaches quantify operational risk without attempting to identify the events or causes of losses. Bottom-up models quantify operational risk on a micro level being based on identified internal events. The obstacle hindering the implementation of these models is the scarcity of available historical operational loss data. Keywords: operational risk; top-down models; bottom-up models; arrival process; loss severity; hazard rate