Factor decomposition to securities

Discussion on Value-at-Risk Models
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mrpmkt
Posts: 11
Joined: Thu Aug 06, 2009 6:06 pm

Factor decomposition to securities

Postby mrpmkt » Wed Jul 18, 2012 7:52 pm

Hi,

I have an equity portfolio of 10 US stocks. Using 3 factors (industry level factors) I have calculated the portfolio VaR based on the factor covariance matrix and the exposures of the securities to the factors. My question is how do I attribute the overall VaR to the 10 stocks that make up the portfolio? Can I use the factor loadings to calculate VaR for each security?

Thanks

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: Factor decomposition to securities

Postby coalexander » Thu Jul 19, 2012 9:25 am

Hi,

The factor model gives you the systematic VaR only, which is based on the explained variance - ignoring the residual variance.

You first do regressions for each stock, then aggregate using portfolio weights to get portfolio systematic VaR.

These regressions have already given you the VaR for each security.

Hope this clarifies, Carol


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