VAR vs expected shortfall
Value-at-risk is often criticised as not presenting a full picture of the risks a company faces. Here, John Hull discusses the limitations of VAR and the relative advantages of an alternative measure, expected shortfall
Value-at-risk is defined as the loss level that will not be exceeded with a certain confidence level during a certain period of time. For example, if a bank's 10-day 99% VAR is $3 million, there is considered to be only a 1% chance that losses will exceed $3 million in 10 days. If we are going to use one measure describing the risk in a particular situation, is VAR the best choice? One problem with VAR is that, when used in an attempt to limit the risks taken by a trader, it can lead to
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