Equity VaR

rayso33 · October 23rd, 2009, 9:26 am

I have a system that calculate an individual equity var based on volatility of index and the beta of that equity. But the VaR is very difficult from what I calculated from individual equity volatility.And I checked the data, the index volatility is about 45%, and individual equity volatility is about 70%, but their beta is just 0.9. It seems that the beta model for equity var is not valid.Am I correct.Thanks

daveangel · October 23rd, 2009, 9:36 am

you are ignoring the non-systematic risk. dont forget CAPM isr = rf + beta*(rm-rf) + epsilonif you have a sufficiently diversified portfolio such that your non-systematic risk has been diversified then you can ignore it and use beta.

rayso33 · October 23rd, 2009, 9:53 am

So the beta method only apply to well-diversified portfolio, or those equities are the memeber of index?

daveangel · October 23rd, 2009, 10:26 am

beta is applicable to individual securities - but you cannot say the vol of a stock is beta times the vol of the index.

rayso33 · October 27th, 2009, 10:54 am

Thanks.Is it possible to calculate the volatility of individual stock from market index volatility and beta?and why some VaR calculation engine use the market index as base to calculate the VaR of individual stock rather than the using the price of individual stock.Thanks again