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Stock Market Reaction to Operational Risk Events: An Empirical Analysis of the J&K Bank Limited

Over the past three decades, Operational risk has evolved as a disastrous risk threatening the survival of financial industry globally. There is now a shift in treatment of this risk from being considered merely an idiosyncratic type to a systemic risk category. These changes have triggered a movement for determining explicit capital allocation in banks to cover their unexpected losses arising out of such a risk category. However, such a pursuit of achieving more safety has exposed banks to severe challenges in the form of development of both operational risk events database and robust risk measurement systems. Aftermath these challenges, banks have heavily invested in information technology so that adequate proprietary data bases of historical Operational risk events and sophisticated measurement models are developed. At the same time, maturity and the level of disclosures about operational risk events by the financial industry in the mature economies of the world have increased tremendously, however, such disclosures of Operational risk events by the financial industry in India though continues to be at a nascent stage. Due to this problem, the subject of Operational risk has caught less attention of the researches in India. Given the difficulties of paucity of data about operational risk events, the present study using alternate means has related print and electronic media reported operational risk events with the performance of a select banking firm to find out if such events cause adverse effects on its market performance. For this purpose, a sample comprising of wide ranging operational risk events of the select banking firm have been collected for the period 2010 -2015. The study uses OLS regression analysis by employing single factor and two factor methodology to investigate the effect of operational risk events on the market performance of the selected banking firm.