Phase Transitions in Operational Risk

Details Phase Transitions in Operational Risk Phase Transitions in Operational Risk

2006-09-14

arxiv.org/abs/physics/0609130v2

Physics

Physics and Society

13 pages, 7 figures. Accepted in Physical Review E

Scientific paper

10.1103/PhysRevE.75.016111

In this paper we explore the functional correlation approach to operational risk. We consider networks with heterogeneous a-priori conditional and unconditional failure probability. In the limit of sparse connectivity, self-consistent expressions for the dynamical evolution of order parameters are obtained. Under equilibrium conditions, expressions for the stationary states are also obtained. The consequences of the analytical theory developed are analyzed using phase diagrams. We find co-existence of operational and non-operational phases, much as in liquid-gas systems. Such systems are susceptible to discontinuous phase transitions from the operational to non-operational phase via catastrophic breakdown. We find this feature to be robust against variation of the microscopic modelling assumptions.

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