A two-stage general approach to aggregate multiple bank risks

Xiaoqian Zhu, Lu Wei and Jianping Li

Finance Research Letters, 2021, vol. 40, issue C

Abstract: There are many types of bank risks and their basic characteristics vary greatly differently, therefore, how to effectively aggregate three or more risks is still a great challenge. This paper proposes a novel two-stage bank risk aggregation approach to solve this problem. The risks are firstly divided based on whether they have common factors or not, then the top-down approach and bottom-up approach are reasonably combined to aggregate them. It is applied to aggregate credit, market and operational risks of the Chinese banking industry. The comparison with other popular approaches shows that this approach leads to much larger diversification benefits.

Keywords: Risk management; Bank risk; Risk aggregation; Risk factor; Hierarchical copula (search for similar items in EconPapers)
JEL-codes: G20 G32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:40:y:2021:i:c:s154461232030533x

DOI: 10.1016/j.frl.2020.101688

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