Expected Shortfall as a Tool for Financial Risk Management

Carlo Acerbi, Claudio Nordio and Carlo Sirtori
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Claudio Nordio: Derivatives Desk, Abaxbank, Milano Italy
Carlo Sirtori: Derivatives Desk, Abaxbank, Milano Italy

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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)

Date: 2001-02
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