An One-factor VaR Model for Stock Portfolio

The current VaR Model based on J. P. Morgan's RiskMetrics has problem that actual loss exceeds VaR under unstable economic conditions because the current VaR Model can't reflect future economic conditions. In general, any corporation's stock price is determined by the firm's idiosyncratic factor as well as the common systematic factor that influences all stocks in the portfolio. In this study, we propose an One-factor VaR Model for stock portfolio which is decomposed into the common systematic factor and the firm's idiosyncratic factor. We expect that the actual loss will not exceed VaR when the One-factor Model is implemented because the common systematic factor considering the future economic conditions is estimated. Also, we can allocate the stock portfolio to minimize the loss.