Operational risk as a function of the state of the economy

This paper examines the frequency and severity of the operational losses incurred by U.S. firms during the period 1990-2007, as reported by Fitch Risk. The losses are examined in relation to the state of the U.S. economy as represented by the unemployment rate, which is the macroeconomic variable that is most intuitively appealing in terms of association with the incidence of operational losses. The results of structural time series modelling reveal that while total severity and average severity are positively related to the unemployment rate, the frequency of losses is not.