The use of copula functions in risk aggregation

Michal Páleš, Faculty of Economic Informatics, University of Economics in Bratislava, Slovak Republic

Pages: 13 – 22


The copula function (also known as copulas) is now becoming an important tool for modelling random processes in various fields. As part of risk management inactuarial science these functions are used in an aggregation of various risks, where risks are described with different marginal distributions with dependency between them. This particular dependence can be expressed by various types of copula functions, thus using multidimensional distributions without changing the original marginally distributed random variables. Copulas are therefore a tool enabling the creation of combined distribution from the marginal distribution, thus obtaining a corporate density function reflecting the dependence of the modelled random variables. This process then allows us to convert the multidimensional problems of risk management to a one-dimensional problem with a tie which is regulated by a copula. The aim of paper is to familiarize the readers with the current problem, when for the financial risk applications the language R will be used.

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