Research On The Measurement Of Operational Risk Based On Correlation Theory

In recent years, Operational Risk loss events occur frequently in the domestic and foreign commercial banks. And the amount of the loss is larger enough to make the whole world shocked. Therefore, the importance of Operational Risk Management and Control has become a common consensus in the commercial banks and its administration. Basel Committee on Banking Supervision (1999) put up the intention that we need to set capital for Operational Risk. Since then, commercial banks completely abandoned the idea that it is impossible to set capital for Operational Risk. In "Basel II" executed in 2007, the Basel Committee on Banking Supervision proposed specific implementation requirements on Operational Risk Management and Control. So this paper which is based on the"New Capital Accord"and"the operational risk management guidelines"issued by China regulatory authorities in commercial banks is to explore the methods of calculating operational risk capital requirement. The main work of this paper can be presents as the following areas:First, measure Operational Risk must first identify and define the meaning of Operational Risk and make a scientific classification to Operational Risk. So this article makes a detailed description and analysis on the existing definition, classification and characteristics.Second, another prerequisite of Operational Risk management is the measure of operational risk. Accordingly this paper analyses several Operational Risk measurement methods proposed by"Basel II", point out that the commercial banks should give priority to advanced measurement methods.Third, this paper attempts to present a set of tools (correlation coefficient, Copula theory, Common Shock Model) for modeling correlated risks under the literature as a starting point. And based on the analysis of definition and the ideas of each model, this paper finds out the advantages and disadvantages of each method. At last, this paper makes a simple analysis on the research direction about modeling correlation structures.Finally,based on the mechanism of Common Shock factor, this paper proposes a classification. Moreover, this paper applies Common Shock to the modeling of operational risk, pointed out the method for solving the model parameters and the simulation technique, and achieved good results.