Extreme Risk Analysis, July 2009

Abstract

Risk analysis involves gaining deeper insight into the sources of risk, and evaluating whether these risks accurately reflect the views of the portfolio manager. In this paper, we show how to extend standard volatility analytics to shortfall, a measure of extreme risk. Using two examples, we show how shortfall provides a more complete and intuitive picture of risk than value at risk. In two subsequent examples we illustrate the additional perspective offered by analyzing shortfall and volatility in tandem.