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On the Validity of Value-at-Risk: Comparative Analyses with Expected Shortfall

Author

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  • Yamai, Yasuhiro

    (Institute for Monetary and Economic Studies, Bank of Japan)

  • Yoshiba, Toshinao

    (Institute for Monetary and Economic Studies, Bank of Japan)

Abstract

Value-at-risk (VaR) has become a standard measure used in financial risk management due to its conceptual simplicity, computational facility, and ready applicability. However, many authors claim that VaR has several conceptual problems. Artzner et al. (1997, 1999), for example, have cited the following shortcomings of VaR. (1) VaR measures only percentiles of profit-loss distributions, and thus disregards any loss beyond the VaR level ("tail risk"), and (2) VaR is not coherent since it is not sub-additive. To alleviate the problems inherent in VaR, the use of expected shortfall is proposed. In this paper, we provide an overview of studies comparing VaR and expected shortfall to draw practical implications for financial risk management. In particular, we illustrate how tail risk can bring serious practical problems in some cases.

Suggested Citation

  • Yamai, Yasuhiro & Yoshiba, Toshinao, 2002. "On the Validity of Value-at-Risk: Comparative Analyses with Expected Shortfall," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(1), pages 57-85, January.
    • Handle: RePEc:ime:imemes:v:20:y:2002:i:1:p:57-85
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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