easy · FRM Part 1 Valuation and Risk Models
A risk manager switches from a 10-day 99% VaR to a 10-day 99% Expected Shortfall (ES).
How is the ES likely to compare to the VaR for a fat-tailed distribution?
- ES will be larger than VaR only if the distribution exhibits negative skewness.
- ES will be larger than VaR because it averages all losses beyond the VaR threshold.
- ES will be smaller than VaR because it uses more data points, leading to a more stable estimate.
- ES and VaR will be identical if the distribution is symmetric.
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