Pre-conference workshop 2, Monday, March 18th, 2013, New York
Introduction to operational risk modeling Led by: Anna Chernobai, Assistant Professor, Department of Finance, Martin J. Whitman School of Management, SYRACUSE UNIVERSITY
8:30 Registration and breakfast
9:00 Basel II Capital Accord and Operational Risk Basics
- Definition of operational risk
- Business complexity and operational risk event types
- Industry experience with operational risk: Key insights from real data
- Why now? Regulatory requirements for operational risk
- Operational risk vs. market risk and credit risk: Key differences and implications for modelling
- Top-Down or Bottom-Up? Basic Indicator Approach, Standardized Approach, and Advanced Measurement Approach (Loss Distribution Approach)
- Operational Value-at-Risk: Operational risk frequency and severity and putting the two together
- "Fat tails" and why this matters
10:30 Morning coffee break
11:00 Operational Risk Modelling - Part I: Building the Foundation and Exploring the Two Building Blocks - Frequency and Severity
- Modelling operational risk: Basic framework and simple math
- Poisson process and simple steps to apply it to operational risk data in practice
- Poisson process in practice: Linking operational risk to KRIs and incorporating them into the Poisson model
- Severity distributions and why we need them
- The issue of "fat tails," once again
- Extreme Value Theory (EVT) and why we need it
- Challenges of EVT: When it works and when it doesn't work
12:30 Lunch
Operational Risk Modelling - Part II: Developing a Robust Operational Risk Capital Charge Measurement Technique
- Operational risk frequency + severity = operational risk capital charge
- A simple algorithm to compute Value-at-Risk (VaR)
- Validation and making sure it works
- Challenges of VaR: VaR vs. Conditional VaR?
- Challenges of VaR: Incorporating dependence between events into the modelling process
3:00 Afternoon coffee break
4:00 Operational Risk Modelling - Part III: Things about Operational Risk that Excite Academics and What Industry Can Learn from Them
- KRIs and what determines operational risk
- The role of corporate governance
- The role of executive compensation
- Pillar III of Basel II: Market discipline and disclosure. Do investors actually care about operational risk?
- Operational risk and credit default swaps (CDS) market
5:00 End of workshop
