For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VAR) may be very large.

Question

Quizplus · Accepted Answer

Expected shortfall (ES) tends to be larger than value at risk (VaR) in fat-tailed distributions because ES accounts for the average of the losses in the tail beyond the VaR threshold, capturing extreme losses more effectively.

For Situations in Which Probability Distributions Exhibit Fat Tail Losses