On the aggregation of risk

Michael Brockmann and Michael Kalkbrener

Journal of Risk

Abstract: ABSTRACT The objective of this paper is to propose a general framework for aggregating economic capital across risk types. Our starting point is the class of aggregation models that operate in a single-period framework, typically with a planning horizon of one year. As an example, we present Deutsche Bank's economic capital aggregation model including calibration techniques for correlation parameters. The second part of the paper focuses on the development of multi-period extensions of the traditional single-period approach.We argue that multi-period models provide the natural setting for aggregating risk types with different liquidity profiles. Several rollover and risk management strategies are presented and their impact is analyzed in a number of examples.

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