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CMA Final · Risk Management in Banking and Insurance · Market Risk Management

Which of the following is a limitation of Value at Risk as a market risk measure that Expected Shortfall (ES) addresses?

VaR does not reveal how large losses may be beyond the confidence threshold, which is the tail risk issue. Expected Shortfall addresses this by averaging losses in the tail beyond the VaR level, which is why Basel's revised market risk framework moved towards using it.

  1. AVaR cannot be computed for equity positions
  2. BVaR gives no information on the size of losses beyond the confidence thresholdCorrect
  3. CVaR requires a holding period of exactly one year
  4. DVaR always overstates losses compared with ES

Explanation

VaR states only the loss threshold at a confidence level and says nothing about how severe losses are in the tail beyond it. ES averages losses beyond that threshold, capturing tail severity. VaR can be computed for equities and any holding period, and ES is never lower than VaR at the same confidence level.

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