Risk aggregation considering inter-risk dependence has always been a challenge to both researchers and practitioners. The objective of this study is to formulate ways of aggregation of bank risks and comprehensively compare simple summation, variance–covariance and copula approach. Firstly, the three popular approaches are adopted to aggregate credit risk, market risk and operational risk of banks based on Austrian banking data. Then, two comparisons are mainly made. Total risks aggregated by different approaches are compared to analyze their relative magnitudes. Diversification benefits of different approaches are further compared to investigate their tail dependence structures. Based on the empirical analysis, some facts are verified and some interesting findings are uncovered, leading to the conclusions that simple summation approach is too conservative and variance–covariance approach is overly optimistic, so it is suggested that copula approach is the future major trend for bank risk aggregation. Especially, t copula with degree of freedom between 1 and 10 is a good choice to capture tail dependence while Gaussian copula is not recommended. Besides, the proposed mixture copula consisting of t copula and Gumbel copula exhibits heavier right tail dependence than single t copula.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Dec 28, 2013
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera