A Reverse ES (CVaR) Optimization Formula

Yuanying Guan, Zhanyi Jiao and Ruodu Wang

North American Actuarial Journal, 2024, vol. 28, issue 3, 611-625

Abstract: The celebrated Expected Shortfall (ES, also known as tail Value at Risk or conditional Value at Risk) optimization formula implies that ES at a fixed probability level is the minimum of a linear real function plus a scaled mean excess function. We establish a reverse ES optimization formula that says that a mean excess function at any fixed threshold is the maximum of an ES curve minus a linear function. Despite being a simple result, this formula reveals elegant symmetries between the mean excess function and the ES curve, as well as their optimizers. The reverse ES optimization formula is closely related to the Fenchel-Legendre transforms, and our formulas are generalized from ES to optimized certainty equivalents, a popular class of convex risk measures. We analyze worst-case values of the mean excess function under two popular settings of model uncertainty to illustrate the usefulness of the reverse ES optimization formula, and this is further demonstrated with an application using insurance datasets.

Date: 2024
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DOI: 10.1080/10920277.2023.2249524

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