Risk aggregation and capital allocation using a new generalized Archimedean copula

Abstract

In this paper, we address risk aggregation and capital allocation problems in the presence of dependence between risks. The dependence structure is defined by a mixed Bernstein copula which represents a generalization of the well-known Archimedean copulas. Using this new copula, the probability density function and the cumulative distribution function of the aggregate risk are obtained. Then, closed-form expressions for basic risk measures, such as tail value at risk (TVaR) and TVaR-based allocations, are derived.