Shortfall: a tail of two parts
Richard Martin and Dirk Tasche show that the expected shortfall, when used in the conditional independence framework, has an elegant decomposition into systematic (risk-factor-driven) and unsystematic parts. The theory is compared and contrasted with the well-known, and analogous, decomposition for variance
One of the challenges in trading and risk management of portfolios and portfolio derivatives is understanding where the risk is coming from - a difficulty because there are many underlyings. The initial objective of credit portfolio modelling 10 or so years ago was simply to construct a distribution of loss or profit and loss, thereby only measuring risk at portfolio level. More recently, it has
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