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Risk aggregation and Extreme Events [58]

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Bullet points include: Major practical issue facing firms is how to aggregate risk Across different parts of organisation and/or different types of risk Most common approach is to assume a suitable correlation matrix Simply adding separate VaRs together is too conservative As makes no allowance for diversification benefits Basel II follows block additive approach Solvency II (like ICA/ICAAP) accepts/uses more sophisticated aggregation approaches, if justified (N.B. but then issue of how much diversification benefit to allow)

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