Expected Shortfall Theory

Expected Shortfall (ES) is a financial risk measure that estimates the average loss an investor could face during extreme market downturns, beyond a certain confidence level. Unlike Value at Risk (VaR), which identifies a threshold loss not likely to be exceeded, ES focuses on the severity of losses in the worst-case scenarios, providing a clearer picture of potential extreme risks. It helps investors and institutions understand and prepare for rare but damaging financial events by quantifying the average loss in the most adverse situations.