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Review of Derivatives Research

, Volume 13, Issue 3, pp 273–295 | Cite as

The cost of operational risk loss insurance

  • Robert A. Jarrow
  • Jeff Oxman
  • Yildiray Yildirim
Article

Abstract

Using the Algo FIRST operational risk database, this paper computes the cost of operational risk loss insurance for a sample of banks over a 1-year horizon. The estimated cost of 1-year operational risk loss insurance for an average bank is 1.24% as a percentage of firm value on December 31, 2006, while an average AA bank is 0.24%. These estimates far exceed the typical 1-year default insurance premiums as reflected in market CDS rates for similarly rated banks. These insurance premiums confirm the economic importance of operational risk in the management of financial institutions.

Keywords

Operational risk Loss severity Multinomial logit 

JEL Classification

G21 G28 G13 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • Robert A. Jarrow
    • 1
    • 2
  • Jeff Oxman
    • 3
  • Yildiray Yildirim
    • 3
  1. 1.Johnson Graduate School of ManagementCornell UniversityIthacaUSA
  2. 2.Kamakura CorporationHonoluluUSA
  3. 3.Martin J. Whitman School of ManagementSyracuse UniversitySyracuseUSA

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