1. 6. For equity prices, there must be risk factors corresponding to each of the equity markets in which the Bank holds significant positions. The sophistication and nature of the modelling technique for a given market must correspond to the Bank’s exposure to the overall market as well as its concentration in individual equity issues in that market.
2. 7. At a minimum, there must be a risk factor that is designed to capture market-wide movements in equity prices (e.g. a market index). Positions in individual securities or in sector indices could be expressed in “beta-equivalents”² relative to this market-wide index. Alternatively, a Bank may identify risk factors corresponding to various sectors of the overall equity market (for instance, industry sectors or cyclical and non-cyclical sectors), or specify risk factors corresponding to the volatility of individual equity issues.

² A “beta-equivalent” position would be calculated from a market model of equity price returns (such as the Capital Asset Pricing Model) by regressing the return on the individual stock or sector index on the risk-free rate of return and the return on the market index.