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Systemic operational risk

Author

Listed:
  • Thomas Kaspereit
  • Kerstin Lopatta
  • Suren Pakhchanyan
  • Jörg Prokop

Abstract

Purpose - The aim of this paper is to study the information content of operational loss events occurring at European financial institutions with respect to the announcing bank’s industry rivals from an equity investor’s perspective. Design/methodology/approach - The authors conduct an event study to identify spillover effects of operational loss events using the Carhart (1997) four-factor model as a benchmark model. In addition, they conduct multiple regression analyses to investigate the extent to which firm-specific factors or the market environment affect abnormal returns. Findings - They observe significant negative abnormal returns following operational loss announcements exceeding € 50 million for both the announcing firms and their competitors. In addition, they find that stock market reactions occur only within a very small event window around the announcement date, indicating a high degree of market efficiency. Finally, abnormal returns tend to be insignificant for smaller loss amounts. Originality/value - While operational risk is often believed to be strictly firm-specific, the results show that large operational risk events are not purely idiosyncratic; rather, they are systemic in the sense that they have contagious effects on non-event banks. Thus, the authors shed new light on how operational risk affects equity investors’ investment behaviour in an opaque and highly interconnected banking market.

Suggested Citation

  • Thomas Kaspereit & Kerstin Lopatta & Suren Pakhchanyan & Jörg Prokop, 2017. "Systemic operational risk," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 18(3), pages 252-267, May.
    • Handle: RePEc:eme:jrfpps:jrf-11-2016-0141
    DOI: 10.1108/JRF-11-2016-0141
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    Citations

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    Cited by:

    1. 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.
    2. Zängerle, Daniel & Schiereck, Dirk, 2022. "Modelling and predicting enterprise‑level cyber risks in the context of sparse data availability," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 136276, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    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. Sophia Beckett Velez, 2021. "Idiosyncratic Viral Loss Theory: Systemic Operational Losses in Banks," JRFM, MDPI, vol. 14(2), pages 1-13, February.

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