In-depth introduction: Expected shortfall

Despite proposing to replace value-at-risk with expected shortfall, regulators want to retain VAR-based back-testing. That looks odd to some, but quants may provide a way out.


Eight years after the Basel Committee on Banking Supervision drew up the world's first international capital accord, the rules went through a significant revision. The Amendment to incorporate market risks, published in 1996, extended the framework to cover the trading book, and offered banks the choice of two approaches – a standardised framework or one based on the use of internal models. Value-at-risk was selected as the appropriate risk measure.

Regulators anticipated problems with the new

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