Analytics Application: Risk Management

Analytics Application: Risk Management

Outline

• Defining Risk Management

• Types of Risk

• Applications of Analytics in Risk Management➢Financial Risk➢Operational Risk

Risk is…

Potential of gaining orlosing something ofvalue

Due to a potential,uncontrollable outcome

Source: https://en.wikipedia.org/wiki/Risk

What is Risk Management?

Risk Identification

Risk Measurement

Risk Mitigation

Risk Monitoring

Types of Risk

Source: http://smallbusiness.chron.com/types-business-risk-99.html

Strategic Risk Compliance Risk Financial Risk

Operational Risk Reputational Risk

Types of Risk

Source: http://smallbusiness.chron.com/types-business-risk-99.html

Strategic Risk Compliance Risk Financial Risk

Operational Risk Reputational Risk

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Correlation / Concentration of Risks

Association Analysis

• Related Counterparty Exposure

• Cross-default Exposure

• Industry Exposure

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Correlation / Concentration of Risks

Association Analysis

• Related Counterparty Exposure

• Cross-default Exposure

• Industry Exposure

Complex Risk Events

• Path Analysis

• SequenceAnalysis

• Path to default

• Path to Collection

• Path to Incidents

• Path to Fraud

• Path to Market Loss

• Path to Liquidity Loss

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Propensity Models

Logistic Regression

• Acquisition Scoring

• Behavioral Scoring

• Recovery Scoring

Fraud Scoring

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Propensity Models

Logistic Regression

• Acquisition Scoring

• Behavioral Scoring

• Recovery Scoring

Fraud Scoring

Classification / Rule Models

• Decision Trees

• Random Forests

• Credit Policy Rules

• Fraud Policy Rules

• Audit Rules

Trading Rules

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Forecasting • Time series Regression

• Panel models

• Volatilitymodels

• Provisions Forecasts

• Credit riskcapital

OperationalRisk Capital

• Market Risk Capital

• Liquidity Risk Capital

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Forecasting • Time series Regression

• Panel models

• Volatilitymodels

• Provisions Forecasts

• Credit riskcapital

OperationalRisk Capital

• Market Risk Capital

• Liquidity Risk Capital

Stress Testing • Monte Carlo Simulation

• Time-series Regression

Credit Value-at-Risk

Operations Value-at-Risk

Market Value-at-Risk

Analytics in Risk ManagementAnalytics Algorithm CREDIT OPERATIONS MARKET /

LIQUIDITYCOMPLIANCE

Forecasting • Time series Regression

• Panel models

• Volatilitymodels

• Provisions Forecasts

• Credit riskcapital

OperationalRisk Capital

• Market Risk Capital

• Liquidity Risk Capital

Stress Testing • Monte Carlo Simulation

• Time-series Regression

Credit Value-at-Risk

Operations Value-at-Risk

Market Value-at-Risk

Document Analysis

• TopicModels

• TF-IDF

Legal Document Classification / Compliance

Outline

• Defining Risk Management

• Types of Risk

• Applications of Analytics in Risk Management➢Financial Risk➢Operational Risk➢Compliance Risk

Analytics Application: Fraud Management

Outline

• Defining Fraud Detection

• List of Fraud Categories and Types

• Fraud Risk Management

• Survey of Techniques in Anomaly Detection

Fraud is…

ncommon

mperceptibly concealed

ell-considered

ime-evolving

arefully organized

Source: Van Vlasselaer, V., Eliassi-Radj, T., Akoglu, L., Snoeck, M., & Baesens, B. (2015). Gotcha! Network-based Fraud Detection for Social Security Fraud. Management Science, Submitted.

Fraud Types

• Credit Card Fraud

• Insurance Fraud

• Corruption

• Counterfeit

• Product Warranty Fraud

• Healthcare Fraud

• Telecommunications Fraud

• Money Laundering

• Click Fraud

• Identity Theft

• Tax Evasion

• Click Fraud

• Plagiarism

Fraud Management

Fraud Prevention

Fraud Detection

Fraud Response

Refers to measures that can be taken to

avoid or reduce fraud

Ability to recognize or discover fraud

Corrective actions taken in the event of a fraud

to minimize and recover losses and determine

accountabilities

Anomaly Detection

Anomaly Detection TechniquesDESCRIPTIVE

• Graphical Procedures

Box and Whisker Plot

Source: https://www.tibco.com/blog/2017/10/09/top-10-methods-for-outlier-detection-in-spotfire/

Histogram Scatterplot

Anomaly Detection TechniquesDESCRIPTIVE

• Statistical Techniques

z-scores Hypothesis Testing(Break Point and Peer

Analysis)

Association Analysis(Fraud Ring Detection)

Source: Baesens, B., Van Vlasselaer, V., & Verbeke, W. (2015). Fraud Analytics Using Descriptive, Predictive, and Social Network Techniques: A Guide to Data Science for FraudDetection. John Wiley & Sons, Inc.

Anomaly Detection TechniquesDESCRIPTIVE

• Clustering-based Methods

Source: Baesens, B., Van Vlasselaer, V., & Verbeke, W. (2015). Fraud Analytics Using Descriptive, Predictive, and Social Network Techniques: A Guide to Data Science for FraudDetection. John Wiley & Sons, Inc.

Statistical Clustering Analysis Self-organizing Maps

Anomaly Detection TechniquesDESCRIPTIVE

• Social Network Analysis

Source: https://resources.zaloni.com/blog/mitigating-detecting-financial-fraud-with-social-network-analysis-and-graph-database

Anomaly Detection TechniquesPREDICTIVE

Predicting Fraud Cases

• Logistic Regression

• Decision Trees

• Support Vector Machines

• Neural Networks

Source: Baesens, B., Van Vlasselaer, V., & Verbeke, W. (2015). Fraud Analytics Using Descriptive, Predictive, and Social Network Techniques: A Guide to Data Science for FraudDetection. John Wiley & Sons, Inc.

Anomaly Detection TechniquesPREDICTIVE

Predicting Amount of Fraud

• Regression

Source: Baesens, B., Van Vlasselaer, V., & Verbeke, W. (2015). Fraud Analytics Using Descriptive, Predictive, and Social Network Techniques: A Guide to Data Science for FraudDetection. John Wiley & Sons, Inc.

Linear Regression Nonlinear Regression Principal Components Regression

MindMap: Fraud Management