Rogue traders versus value-at-risk and expected shortfall

VAR and ES are ineffective to deter rogue trading

Shortfall

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John Armstrong and Damiano Brigo show that, in a Black-Scholes market, value-at-risk and expected shortfall are irrelevant in limiting traders’ excessive tail risk-seeking behaviour, as modelled by Kahneman and Tversky’s S-shaped utility. The authors argue that to have effective constraints one can introduce a risk limit based on a second, but concave, utility function

In this article, we aim to analyse how classic risk measures such as value-at-risk and expected sho

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