Modeling, Measuring and Hedging Operational Risk [Hardcover]

Marcelo G. Cruz (Author)

Book Description

Publication Date: February 15, 2002 | Series: The Wiley Finance Series (Book 4)

Worldwide banks are keen to find ways of effectively measuring and managing operational risk , yet many find themselves poorly equipped to do this. Operational risk includes concerns about such issues as transaction processing errors, liability situations, and back-office failure. Measuring and Modelling Operational Risk focuses on the measuring and modelling techniques banks and investment companies need to quantify operational risk and provides practical, sensible solutions for doing so.
* Author is one of the leading experts in the field of operational risk.
* Interest in the field is growing rapidly and this is the only book that focuses on the quantitative measuring and modelling of operational risk.
* Includes case vignettes and real-world examples based on the author's extensive experience.

Editorial Reviews

From the Inside Flap

The interest in operational risk has evolved exponentially in the last few years. Up until the Barings Bank collapse in 1995, the term had never been used. Dr Marcelo Cruz is one of the first people to attempt to explain clearly and technically the patterns of this new risk. He has been lecturing on operational risk since 1997 and wrote one of the first academic articles on it, in 1998.

Written in a clear and accessible manner, Modeling, Measuring and Hedging Operational Risk is essential reading for all those concerned with this evolving area of risk.

From the Back Cover

"Dr Marcelo Cruz is rightfully acknowledged as a world expert in the quantification of operational risk. He has set out to produce a book that is comprehensive yet also comprehensible to non-mathematicians - and is to be congratulated for succeeding in this aim. This book should be regarded as essential reading for all professional risk managers, irrespective of their particular lens of perception." Brendan Young, Chairman, Operational Risk Research Forum

"As a technically trained analyst, Marcelo Cruz summarizes a wide range of mathematical techniques. As an experienced capital markets trader and risk manager, he provides real world examples of their relevance for operational risk. This will be a common reference work in the field for years to come." David M. Rowe, Ph.D., Group Executive Vice President for Risk Management Sun Gard Trading and Risk Systems

Operational risk is an important, yet little explored, area within risk management. The need to model and measure the risks arising from operational errors and to allocate capital against them will be soon become a regulatory requirement for financial institutions. In this book, Marcelo Cruz provides a quantitative look at the subject, presenting several mathematical models that can be used and adapted to measure, manage and hedge operational risk.

Based on the author's extensive experience, the book maps out state-of-the-art mathematical and statistical techniques that can be used to model operational risk. In addition, the book describes a variety of appropriate models that can be applied to specific structures or areas, including operational risk database modeling, stochastic models, statistical distributions for frequency and severity, extreme value theory, operational VaR models, artificial intelligence models, dynamic multifactor models, Bayesian analysis, Monte Carlo simulation, stress test/ scenario analysis, real options, state-space models and the Kalman filter, Markovian stochastic models and others. These models have been tested with real data in real operational events. Based on this experience, numerous examples are sited throughout.

Modeling, Measuring and Hedging Operational Risk provides a complete quantitative reference for all those involved in modeling and managing operational risk as well as for those involved with developing hedging products for operational risk within insurance companies and derivatives houses.

See all Editorial Reviews

Product Details

• Hardcover: 346 pages
• Publisher: Wiley; 1 edition (February 15, 2002)
• Language: English
• ISBN-10: 0471515604
• ISBN-13: 978-0471515609
• Product Dimensions: 9.9 x 6.9 x 1 inches
• Shipping Weight: 1.6 pounds (View shipping rates and policies)
• Average Customer Review: 3.1 out of 5 stars  See all reviews (10 customer reviews)
• Amazon Best Sellers Rank: #1,348,992 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

9 of 10 people found the following review helpful:

5.0 out of 5 stars Finally, the "Riskmetrics" for Operational Risk!, March 14, 2002

By A Customer

This review is from: Modeling, Measuring and Hedging Operational Risk (Hardcover)

This is a much expected book in the operational risk area. I have got one as soon as it was released and I am getting more impressed with it every day as I try the models suggested by the author. The book is composed by a coherent sequence of mathematical models and techniques (all nicely explained with examples and extremely well-written)that at the end help you to measure and manage operational risk in practice. All the examples use real loss data and key risk indicators.
It is hard to identify the best part of the book. The chapters on causal models and stress tests are just a prime in the area as much as those on operational VaR. The text on stochastic models left me asking "why didn't I think of that before?". The chapters on the measurement of "soft risks" as those on reputational and key personnel risks are the first that I have seen on the subject and give an excellent insight on how to deal with this extremely difficult subject. This book should be on the shelf of any financial risk manager and it will set up the standards in the area for the next years. Operational risk finally find its "riskmetrics". As much as one day 'riskmetrics', 'creditmetrics' and CreditRisk+ were released by JP Morgan and CSFB setting up the grounds for the development of the both market and credit risk measurement, this book do the same for operational risk. At least everyone involved with operational risk should have it if not for anything just as a reference.

7 of 8 people found the following review helpful:

1.0 out of 5 stars The most annoying "math" book ever, March 19, 2005

By 

j2chow - See all my reviews

This review is from: Modeling, Measuring and Hedging Operational Risk (Hardcover)

Before I read this book, I had heard it was the bible for operation risk and is great as an introductory book for finance. After I read 1/3 of the book, I figured this book is actually for people who failed their second year statistics courses and still have no idea what raw and central moments are. As a grad student in Actuarial Science in one of the best schools in the world, I strongly discourage people from buying this book. Technically, this book has so many mistakes that it would not be qualified as a textbook in any schools in the world. The author introduces a lot of statistical tests without even defining the notations, which makes the tests useless.

8 of 10 people found the following review helpful:

3.0 out of 5 stars Good, but too many bugs, July 1, 2002

By A Customer

This review is from: Modeling, Measuring and Hedging Operational Risk (Hardcover)

This book is probably the best single book available in Operational Risk at the moment. It give a very nice overview of the topic and on implementation possibilities.
Still, there are some letdowns:
1. The last parts on hedging and operational risk management are not very helpful while the part on operational VaR should be expanded.

2. The book contains quite a number of errors. While this is not so important if this happens in written text, it definitely is within formulas (as in density of the normal distribution on page 50, and several others), especially since not everybody will see this kind of mistake at first sight. It should have been revised once more, maybe.

Still, I recommend to anyone who wants to get an overview of operational risk. But read carefully.