Expected Shortfall as a Tool for Financial Risk Management

TL;DR

This paper explores Expected Shortfall as a superior risk measure in finance, highlighting its advantages over Value at Risk, especially its coherence and subadditivity properties for better risk assessment.

Contribution

The paper demonstrates that Expected Shortfall is a coherent risk measure with better properties than VaR, addressing limitations in traditional risk assessment methods.

Findings

Expected Shortfall is subadditive and coherent.

It distinguishes portfolios with different risk levels more effectively.

Expected Shortfall outperforms VaR in risk management applications.

Abstract

We study the properties of Expected Shortfall from the point of view of financial risk management. This measure --- which emerges as a natural remedy in some cases where Value at Risk (VaR) is not able to distinguish portfolios which bear different levels of risk --- is indeed shown to have much better properties than VaR. We show in fact that unlike VaR this variable is in general subadditive and therefore it is a Coherent Measure of Risk in the sense of reference (artzner)