ERM Glossary: Expected shortfall
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The expected shortfall is the mean loss (possibly relative
to some specified loss or profit level) on a portfolio over a given period of
time conditional on losses exceeding a quantile with a given confidence level.
See also here.
A ‘market-implied’ expected shortfall would calculate the
mean loss using a probability distribution derived from market-implied data,
e.g. option prices, whilst a ‘real world’ expected shortfall would calculate
the mean loss using a probability distribution derived from some view of actual
probabilities of occurrence, either extrapolating past data into the future or
via expert judgement (or a mixture).
Usually, Expected Shortfall is interpreted similarly to Tail Value-at-Risk.
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