Expected shortfall (ES)
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The average loss conditional on the loss exceeding Value-at-Risk; also called Conditional VaR (CVaR). Coherent in the Artzner-Delbaen sense (unlike VaR) and required under modern Basel frameworks because it accounts for extreme tail shapes.
Expected shortfall (ES) in plain English
Expected shortfall answers the scary question: "When things go really badly, HOW bad is it on average?" It builds on Value-at-Risk (VaR), which only marks a line like "I won't lose more than $1,000 on 95% of days" — but VaR stays silent about the worst 5%, whether those bad days cost $1,100 or $1,000,000. Expected shortfall fixes that by averaging all the losses beyond that line, so it actually sees the size of the disasters in the tail. Regulators (the Basel rules banks must follow) now prefer it because it's mathematically better-behaved — for instance, combining two portfolios never makes ES look riskier than the parts added up, a sensible property VaR can violate.
Also called: ES
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