Shortfall: a tail of two parts
Richard Martin and Dirk Tasche show that the expected shortfall, when used in the conditional independence framework, has an elegant decomposition into systematic (risk-factor-driven) and unsystematic parts. The theory is compared and contrasted with the well-known, and analogous, decomposition for variance
One of the challenges in trading and risk management of portfolios and portfolio derivatives is understanding where the risk is coming from - a difficulty because there are many underlyings. The initial objective of credit portfolio modelling 10 or so years ago was simply to construct a distribution of loss or profit and loss, thereby only measuring risk at portfolio level. More recently, it has become much easier for market participants to hedge or securitise risk, and various financial
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