Operational Risk toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation

CHAPTER 6

Operational Risk and Stock Market Returns: Evidence from Turkey

M. Nihat Solakoğlu and K. Ahmet Köse

 

 

ABSTRACT

Following several high-severity, low-frequency events in the financial sector, operational risk has gained importance both for regulators and managers of financial sector firms during the last decade. The banking sector in Turkey also experienced a severe crisis, due not only to economic conditions but also to events directly related to operational risk. However, it was only by mid-2007 that banks in Turkey were required to have necessary capital for operational risk. This study investigates the banking sector in Turkey in relation to operational risk. In addition, the study analyzes the reaction of stock market return to operational risk events between 1998 and 2007 using event study analysis. We find that returns show a negative reaction starting right before the event date. Moreover, this negative reaction appears to be significant for pre-2002 events but not for events after 2002.

6.1 INTRODUCTION

For risk management departments in financial institutions, four types of risks need to be managed to minimize the loss of a portfolio or even the firm itself. These risk types are market risk, credit risk, liquidity risk, and operational risk. Market risk is created by the unexpected changes in market prices. Credit risk is the risk financial institutions face when there is a complete or partial loss related to default. Liquidity risk exists if there is ...