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FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

A bank's regulator proposes replacing 99% VaR with 97.5% expected shortfall for capital. A risk manager explains the main practical difference in how the two measures treat the loss tail. Which explanation is most accurate?

Expected shortfall averages the losses beyond the quantile, so it reflects how severe tail losses are, whereas VaR only marks the threshold and ignores what happens past it. For continuous distributions the two differ, with ES at least as large as VaR.

  1. AVaR reports the average loss beyond the quantile, while ES reports only the quantile itself
  2. BES is the loss threshold exceeded with a given probability, and VaR is its tail average
  3. CES averages losses beyond the quantile and therefore reflects tail severity, which VaR ignoresCorrect
  4. DES and VaR are identical for any continuous loss distribution at the same confidence level

Explanation

VaR is a quantile and says nothing about how large losses are beyond it. ES is the expected loss conditional on exceeding VaR, so it captures tail severity. The definitions in the other options are reversed or wrongly claim equivalence.

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