Operational risk: Emerging markets, sectors and measurement

• Introduce a method to measure operational risk in emerging markets.
• Operational risk is higher in emerging markets than developed ones.
• Operational risk dependent on industry sector.
• Market development more dominant influence on operational risk than sector.
• Shape of operational risk distribution affected by market development and sector.

The role of decision support systems in mitigating operational risks in firms is well established. However, there is a lack of investment in decision support systems in emerging markets, even though inadequate operational risk management is a key cause of discouraging external investment. This has also been exacerbated by insufficient understanding of operational risk in emerging markets, which can be attributed to past operational risk measurement techniques, limited studies on emerging markets and inadequate data.In this paper, using current operational risk techniques, the operational risk of developed and emerging market firms is measured for 100 different companies, for 4 different industry sectors and 5 different countries. Firstly, it is found that operational risk is consistently higher in emerging market firms than in the developed markets. Secondly, it is found that operational risk is not only dependent upon the industry sector but also that market development is the more dominant factor. Thirdly, it is found that the market development and the sector influence the shape of the operational risk distribution, in particular tail and skewness risk. Furthermore, an operational risk measurement method is provided that is applicable to emerging markets. Our results are consistent with under investment in decision support systems in emerging markets and imply operational risk management can be improved by increased investment.