Correlation, co-dependency and risk aggregation [3]

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Bullet points include: Most risks do not happen either Simultaneously, or Completely independent of each other. To form a holistic risk picture we need to model co-dependency of risk exposures. Loosely referred to as ‘correlation’. But correlation has a specific statistical meaning, to do with co-dependency averaged across the entire spectrum of outcomes. Often, we will be particularly interested in co-dependency just in parts of the overall spectrum of outcomes, e.g. downside tails

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