Review of the Use of Bayesian Networks in Finance


Bayesian Networks are a tool of new application to the question of risks, in particular for modeling operational risk. Its use for measuring operational risk in the financial sector has channeled large efforts in developing new methods that measure this type of risk which allow improving the internal gestation of the operational processes. Applying Bayesian Networks for modeling operational risk presents the opportunity to incorporate elements of qualitative analysis as well as the opinion of experts in the process of selecting interest variables, defining the structure of the model through its dependencies of causality, such as the specification of a priori distributions and conditional probabilities of each node. It has been found that Bayesian models that incorporate data as well as expert judgment (especially about causality) work better than any other method applicable in the field.

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