In this paper, we propose a general continuous-time stochastic-modeling framework where a financial firm offers incentive bonuses to a team of employees, who would thus exert effort to reduce operational risk losses. We characterize employees' Nash equilibrium efforts and the firm's optimal...

In this paper, we propose a general modeling framework for operational risk management of financial firms. We consider operational risk events as shocks to a financial firm's value process, and then study capital investments in preventive and corrective controls to mitigate risk losses. The...