Correlation, co-dependency and risk aggregation [35]

Go to: Summary | Previous | Next   
Bullet points include: Major practical issue facing firms is how to aggregate risk. Across different parts of organisation and/or across 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. Although Basel II largely follows this 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)

Contents | Prev | Next | ERM Lecture Series

Desktop view | Switch to Mobile