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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