FIN-04-019 |
NYU Stern School of Business |
September 2004
Linda Allen and Turan G. Bali
ABSTRACT
Using equity returns for financial institutions we estimate both catastrophic and operational risk
measures over the period 1973-2003. We find evidence of cyclical components in both the catastrophic and
operational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized
Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately
18% of financial institutions’ returns represent compensation for operational risk. However, depository
institutions are exposed to operational risk levels that average 39% of the overall equity risk premium.
Moreover, operational risk events are more likely to be the cause of large unexpected catastrophic losses,
although when they occur, the losses are smaller than those resulting from a combination of market risk,
credit risk or other risk events.
Linda Allen
Institution: Stern School of Business, New York University
Email: lallen@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~lallen
Turan G. Bali
Institution: Baruch College, Zicklin School of Business, CUNY, One Bernard Baruch Way, Box 10-225, New York, New York 10010
Email: Turan_Bali@baruch.cuny.edu
Telephone: (646) 312-3506
Fax: (646) 312-3451
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