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How to validate value-at-risk calculation on an equity portfolio using equity sensitivities? I don't have trouble doing that for rates instruments or options but I don't know which underlying risk factor can we use on an equity to compute sensitivities.

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Well, you can either come up with a model that provides shocks on individual equities and then directly use them. Or you can come up with a model that provides shocks on a few risk factors and the you have to determine the sensitivity (beta) of the individual equities towards your common risk factor (which can be a market index or a financial index). From here it's of course possible to go crazy by making less strong assumptions regarding functional behavior.

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  • $\begingroup$ Thank tou Bram for your answer. If I dont get things wrong, your second proposition infer that you find specific risk factors for an equity (from financial indexes or industry related factors) and determine the sensitivity (maybe through regression?). My problem with this approach is that it seems very specific to the individual equity and that for a portfolio with 4 equities for example we can have 4 different models. Did I get it right? Is it possible to have a more generic approach which would be consistent with a maximum type of equity? Sorry for my english though, I mostly speak french. $\endgroup$ – Wane Mamadou Jan 9 at 14:15
  • $\begingroup$ Yes, but there is model risk here. But that als holds for picking a broad market index.Picking factors that have been shown to significant and persistent over time helps having some comfort.Another issue is typically data availability $\endgroup$ – Bram Jan 11 at 10:54

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