Robust and Coherent: Expected Shortfall vs VaR (and a view of peruvian murphic risk management)



Just came across this short paper giving a concise overview of the robust and coherent risk measure Expected Shortfall (ES) against the more fragile VaR.

Expected shortfall, while still relatively at the fringes of risk management practice at financial institutions and regulators, has long been commonly used as a loss estimation model by actuaries under conditions of incomplete information, aggregate claims etc in the more stodgy insurance world.

Though as the author rightly informs, the spirit/principle of expected shortfall as a risk measure/management tool has been integral at some of the largest derivative exchanges in the world (all based in large part on CME-SPAN).
Indeed, expected shortfall or a more robust conditional-VaR may be a worthwhile reference for the trader looking towards appropriate risk-sizing.

But beyond risk or loss estimations, perhaps what is even more pertinent, is to determine which volatility regime (and therefore the appropriate trading strategy) we are in now. And here the use of a non-normal risk/volatility measure like expected shortfall will be most useful.
What volatility regime are we in now ?

[Here is Bo Keely of dailyspeculations speaking of “Peru’s queer bureaucracy and built-in Murphy’s Law”, almost as an endogenic risk factor or expected shortfall which one must constantly be aware of and account for, as he weighs the odds of surviving –nay, prospering– as an expat and expert tramp in the steamy Amazon.

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