Risk Measurement of Sovereign Wealth Funds: The Significant Advantages of ES over VaR

Yuxuan Gao ()
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Yuxuan Gao: Shandong University of Finance and Economics, School of Insurance

A chapter in Proceedings of the 2026 11th International Conference on Financial Innovation and Economic Development (ICFIED 2026), 2026, pp 126-135 from Springer

Abstract: Abstract The paper focuses on optimizing the risk assessment system of Sovereign Wealth Funds (SWFs) as the core research direction, with an emphasis on the different applications of Value at Risk (VaR) and Expected Shortfall (ES). SWFs with long-term investment undertake economic and diplomatic goals. It still faces multiple risks. Risk management is of significance. By contracting the theories between ES and VaR, the paper find that VaR only estimates the loss threshold at a given confidence level. VaR’s limitations include ignoring the extreme losses scale, lacking subadditivity, and being unreliable under market pressure. ES can overcome the limitations to reflect extreme risk more comprehensively, and the optimization results are more stable. Moreover, the article sets a framework for the application in SWFs to indicate that ES is superior to VaR, considering the debt crisis, fragmented world, and other extreme scenarios. The paper also shows some weaknesses of ES to improve the risk assessment method in SWEs.

Keywords: Sovereign Wealth Funds (SWFs); Value at Risk (VaR); Expected Shortfall (ES) (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6239-642-5_14

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DOI: 10.2991/978-94-6239-642-5_14

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