A type or method of value at risk (VaR) that focuses on common risk factors at a broader level amongst a number of countries (represented as a bloc) or worldwide. As a common factor model, it includes not only trade relationships but also financial linkages, typically through interest rates, stock prices and exchange rates, among others. It is particularly effective in accounting for the common factor interdependencies and global co-movements of business cycles.
For example, value at risk can be is estimated for a specific economic bloc, such as the euro area (perceived and treated as a single economy). Such a tool can consider the impact of external shocks on the economic bloc as a whole, curbing down any possible inconsistencies that could arise if the individual economies in the bloc or region were treated and modeled separately.
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