Operational risk and equity prices |
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Authors: | Michael Shafer Yildiray Yildirim |
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Affiliation: | 1. Providence College School of Business, Koffler Hall, Providence, RI 02918, United States;2. Whitman School of Management, Syracuse University, 721 University Ave., Syracuse, NY 13244, United States |
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Abstract: | We use an empirical model to categorize firms into portfolios based on operational risk. Using these portfolios, we show that a strategy of buying firms in the highest decile of operational risk and shorting firms in the lowest decile of operational risk earned a positive but insignificant risk-adjusted average return of 0.72% per month from 1990 to 2000. However, from 2001 to 2010, the same strategy earned a significantly negative risk-adjusted average return of ?1.50% per month. This change occurred during a time characterized by an increasing number of high profile operational losses and regulatory changes surrounding operational risk. |
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Keywords: | Operational risk Stock returns |
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