Definition
Conditional VaR (CVaR), also called Expected Shortfall (ES), measures the average loss in the tail beyond VaR. While VaR says "losses won't exceed X with 95% confidence," CVaR says "when losses do exceed VaR, they average Y." CVaR is coherent (satisfies diversification), unlike VaR, and is increasingly preferred by regulators under Basel III.
functions Formula
CVaR = E[Loss | Loss > VaR]
lightbulb Example
95% VaR is $500K. CVaR at 95% is $750K, meaning when losses exceed $500K (the worst 5% of days), the average loss is $750K. This better captures tail risk severity.
verified_user Key Points
- Measures average loss in the tail beyond VaR
- Coherent risk measure (VaR is not)
- Preferred by Basel III over VaR
- Better captures extreme tail risk