A factor model explains the variation in the dependent variable (e.g., stock returns, revenue, or expenses) with macroeconomic factors through regression analysis. The R2 measures the proportion of variation explained by the factors. Operational risk is the idiosyncratic variation left unexplained by the factors, or , called residual variance. Coefficient estimates measure the sensitivity of the operating variable to changes in the associated macroeconomic factor. Operating leverage is the change in variable costs for a given change in total assets. A measure of operational risk is unexpected changes in operating leverage.
, called residual variance. Coefficient estimates measure the sensitivity of the operating variable to changes in the associated macroeconomic factor. Operating leverage is the change in variable costs for a given change in total assets. A measure of operational risk is unexpected changes in operating leverage. 
