Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

12.5 Conclusion

Operational and liquidity risk are the poor cousins of market and credit risk. Progress has been made, particularly in the arena of operational risk, but much more work needs to be done. Market and credit risk are more developed partly because they are easier, higher profile, and more amenable to quantitative analysis, with data readily available. Losses from liquidity and operational events are just as painful, however.

There are additional risks that a firm will face. Strategic and reputational risk is explicitly excluded from the BCBS definition of operational risk, but failures in these areas can be the most damaging to a firm in the long run. Yet it might be right to exclude them, as they fall so entirely in the realm of traditional management, with quantitative and mathematical techniques having little to offer.

Notes

1. The combination of a bursting asset bubble and a liquidity crisis has been quite common over history—for the United States, think about 1873, 1893, 1907–1908, and 1929–1933 (the Great Depression).

2. Also see Jorion (2007, section 13.2) for a discussion of these asset liquidity issues.

3. From Figure 12.2 it might appear that a longer liquidation period is always better. This is not the case. As we liquidate over longer periods the volatility eventually rises much more than the cost decreases. This can be seen in Table 12.1

4. As mentioned earlier, this section follows Marrison (2002, ch. 14).

5. This shows the benefit of defining and analyzing ...