Aggregation

Determining the risk capital for a financial institution, the risk measure for an overall portfolio must be calculated. Therefore, aggregation methods have to be considered. There are various popular concepts to aggregate risks. First, the concept of the variance–covariance matrix is explained. After that the concept of copulas is introduced. The advantage of copulas is that also extreme events can be modeled—a phenomenon that can often be observed in financial practice and is therefore highly relevant. Based on these dependencies, an aggregate risk capital can be determined.