VAR and style analysis question

sanfrangirl · August 31, 2009, 1:10am

Hi there, I was thinking about Value at Market Risk measure which takes into account the correlation of risk factors from style analysis which is based on (multi-factor) regression analysis. One of the assumptions of regression analysis is that the correlation of independent variables is zero (the violation is referred to as multicollinearity) so I would think there would be an assumption that the correlation of risk factors is zero for Value at Market Risk, but this is not the case. Can anyone please explain what I am not seeing and help bridge the gap of my understanding of regression analysis and the Value at Mark Risk concept? Thanks!!

peteus325 · August 31, 2009, 5:45am

According to Lhabitant, he uses the CSFB/Tremont sub-indices as the factors for the multi-factor regression analysis; and the sub-indices are supposed to be uncorrelated to each other.

sanfrangirl · September 9, 2009, 2:38am

Thanks, but how does that tie to VaMR?

peteus325 · September 9, 2009, 4:24am

VaMR, by definition, is a VaR due to market/style index moves.