Expected shortfall

Expected shortfall (ES) is a risk measure—a concept used in the field of financial risk measurement to evaluate the market risk or credit risk of a portfolio. The "expected shortfall at q% level" is the expected return on the portfolio in the worst ${\displaystyle q\%}$ of cases. ES is an alternative to value at risk that is more sensitive to the shape of the tail of the loss distribution.

Expected shortfall is also called conditional value at risk (CVaR),^[1] average value at risk (AVaR), expected tail loss (ETL), and superquantile.^[2]

ES estimates the risk of an investment in a conservative way, focusing on the less profitable outcomes. For high values of ${\displaystyle q}$ it ignores the most profitable but unlikely possibilities, while for small values of ${\displaystyle q}$ it focuses on the worst losses. On the other hand, unlike the discounted maximum loss, even for lower values of ${\displaystyle q}$ the expected shortfall does not consider only the single most catastrophic outcome. A value of ${\displaystyle q}$ often used in practice is 5%.^{[citation needed]}

Expected shortfall is considered a more useful risk measure than VaR because it is a coherent spectral measure of financial portfolio risk. It is calculated for a given quantile-level ${\displaystyle q}$ and is defined to be the mean loss of portfolio value given that a loss is occurring at or below the ${\displaystyle q}$-quantile.