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The impact of spillover effects from operational risk events: a model from a portfolio perspective

Author

Listed:
  • Christian Eckert
  • Nadine Gatzert

Abstract

Purpose - Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of the banking and insurance industry. The purpose of this paper is 1) to model such spillover effects in a network from a portfolio perspective and 2) to holistically assess operational risk, reputational risk and the risk of spillover effects, taking into account the dependencies between these risk types. Design/methodology/approach - The authors propose different approaches to model spillover effects with different complexity, including stochasticity and influencing factors within the industry network. They then calibrate the model based on information from previous empirical literature. Findings - The results emphasize that spillover effects can represent a considerable (non-diversifiable) risk, especially in portfolios, and that neglecting them may lead to a severe underestimation of the actual impact of single operational loss events. Originality/value - This study is relevant not only for a firm’s risk management strategy but also for investors holding a portfolio of firms potentially subject to spillover effects.

Suggested Citation

  • Christian Eckert & Nadine Gatzert, 2019. "The impact of spillover effects from operational risk events: a model from a portfolio perspective," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 20(2), pages 176-200, June.
    • Handle: RePEc:eme:jrfpps:jrf-09-2018-0143
    DOI: 10.1108/JRF-09-2018-0143
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    Citations

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    Cited by:

    1. David Adeabah & Charles Andoh & Simplice Asongu & Albert Gemegah, 2023. "Reputational risks in banks: A review of research themes, frameworks, methods, and future research directions," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 321-350, April.
    2. Eckert, Christian & Gatzert, Nadine & Heidinger, Dinah, 2020. "Empirically assessing and modeling spillover effects from operational risk events in the insurance industry," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 72-83.
    3. Christian Eckert, 2020. "Risk and risk management of spillover effects: Evidence from the literature," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(1), pages 75-104, March.
    4. Chen, Zhonglu & Mirza, Nawazish & Huang, Lei & Umar, Muhammad, 2022. "Green Banking—Can Financial Institutions support green recovery?," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 389-395.

    More about this item

    Keywords

    Spillover effects; Reputation risk; Operational risk; Accumulation risk; G20; G21; G22; G32;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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