While scenario analysis is an important tool for the risk measurement, its use in the measurement of operational risk capital has been quite arbitrary and often inaccurate. Using a method based on the change of measure approach used in financial economics for asset pricing we will show how one can measure operational risk exposure of an institution using scenario analysis along with the internal loss event data. We will also show that the proposed method can be used in many different situations such as in the calculation of operation risk capital, stress testing, and what-if assessment for the scenario analysis, among others. Using this method one could create a catastrophic bond on various segments of operation risk exposures of an institution.

Please note that the presentation is based on my latest paper ( with David Babbel) available at the following:

http://fic.wharton.upenn.edu/fic/papers/10/p1010htm.htm