Expected Shortfall and Beyond
by Dirk Tasche of Deutsche Bundesbank
October 20, 2002
Abstract: Financial institutions have to allocate so-called economic capital in order to guarantee solvency to their clients and counterparties. Mathematically speaking, any methodology of allocating capital is a risk measure, i.e. a function mapping random variables to the real numbers. Nowadays value-at-risk, which is defined as a fixed level quantile of the random variable under consideration, is the most popular risk measure. Unfortunately, it fails to reward diversification, as it is not subadditive.
Keywords: Expected Shortfall, Value-at-Risk, Spectral Risk Measure, coherence, risk contribution
Published in: Journal of Banking & Finance, Vol. 26, No. 7, (July 2002), pp. 1519-1533.