Expected Shortfall & Conditional Value at Risk (CVaR) Explained

Unlock the secrets of financial risk management with Ryan O'Connell, CFA, FRM, as he dives deep into Expected Shortfall, Conditional Value at Risk (CVaR), and Value at Risk (VaR). Discover why Expected Shortfall is a crucial metric for assessing tail risk and how it compares to the broader applications of CVaR and VaR in risk analysis. Learn practical skills with step-by-step tutorials on calculating VaR and Expected Shortfall using Excel, tailored for finance professionals seeking robust risk assessment tools. This comprehensive guide ensures you master Expected Shortfall and understand its significance in minimizing financial risks.
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Chapters:
0:00 - Why is Expected Shortfall & CVaR Important?
0:57 - Value at Risk (VaR) Explained
3:40 - Expected Shortfall & Conditional VaR Explained
5:46 - Calculate Return & Standard Deviation in Excel
8:10 - Calculate Value at Risk (VaR) in Excel
9:46 - Calculate Expected Shortfall in Excel
*Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.

[@RyanOConnellCFA]

🎓 Tutor With Me: 1-On-1 Video Call Sessions Available ► Join me for personalized finance tutoring tailored to your goals: ryanoconnellfinance.com/finance-tutoring/ 💾 Download Free Excel File: ► Grab the file from this video here: ryanoconnellfinance.com/product/expected-shortfall-value-at-risk-calculator-in-excel/

[@pipekans]

I came for copper and found gold. Thank you for sharing your knowledge.

[@RyanOConnellCFA]

Really appreciate that Felipa! Thank you for your feedback

[@cherlynn99]

Fantastic content!! So glad I found you!

[@RyanOConnellCFA]

Thank you, I'm glad you found me as well!

[@husseinarslan7173]

From my earliest years until I turned 18, I grappled with self-doubt and academic challenges. Despite my best efforts, subjects like math, English, and physics remained elusive to me throughout my school years. Yet, amidst these struggles, a greater trial awaited: from ages 10 to 17, I underwent the taxing ordeal of dialysis. However, within the depths of adversity, I nurtured a flicker of hope and ambition. At 17, a life-changing kidney transplant marked a turning point in my journey, infusing me with renewed determination and a sense of purpose. But the road to success was far from smooth. In the corridors of academia, I encountered the hurtful words of bullies and the isolating silence of indifference. Yet, I refused to be defined by my setbacks. Instead, I transformed them into stepping stones, each hurdle propelling me closer to my dreams. Today, as I reflect on the trials I've overcome, I am filled with gratitude for the resilience that sustained me. With unwavering support from loved ones, I navigated the darkest of nights, emerging stronger and more determined than ever. My journey, though marked by challenges, is a testament to the power of perseverance and the resilience of the human spirit. And as I set my sights on a career in finance, particularly in pursuing my dream of becoming a CFA, I do so with a heart full of hope and a steadfast belief in the boundless possibilities that lie ahead.

[@husseinarslan7173]

This is my stroy!

[@RyanOConnellCFA]

Hussein that was very poetic and it is cool to hear your story! I wish you the best of luck as you pursue the CFA. You will crush it after what you have been through

[@husseinarslan7173]

@@RyanOConnellCFA how can I talking with you? Do you have linkedlen?

[@husseinarslan7173]

@@RyanOConnellCFA I was failare in all topics at the school, From 3 years to 17 years old, in university the GPA not good.

[@RyanOConnellCFA]

@@husseinarslan7173 The CFA is a different animal than university! It is you against the world in the CFA since you do it all alone. Perhaps you will struggle in that environment as well. But try to see if you can adopt a mentality that will carry you through the CFA

[@balchandrapaudel8202]

you are best teacher

[@RyanOConnellCFA]

I really appreciate that, thank you

[@cristianjimenez3264]

Awesome videos like always

[@RyanOConnellCFA]

I appreciate that Cristian!

[@mgu5929]

u r a beast my man, thx for the content 🙏🏻

[@RyanOConnellCFA]

Appreciate it! Its my pleasure

[@ryszardsikorski6355]

Great explanations, please keep it up. Greetings from Poland.

[@RyanOConnellCFA]

Will do and thank you! Greetings from Texas in the US

[@fazirana123]

very easy to follow . thanks for sharing your knowledge.

[@RyanOConnellCFA]

Glad it was helpful! It is my pleasure

[@chikhimtang1219]

Just to clarify, for expected shortfall, is the only way to do it via historical returns? Was just thinking about this because for VaR you were using parametric method but for expected shortfall you took the history of the returns

[@RyanOConnellCFA]

Hi @chikhimtang1219, great question! Expected Shortfall (ES) or Conditional Value at Risk (CVaR) can indeed be calculated using historical returns, as shown in the video, but that's not the only method. You can also use the parametric method or Monte Carlo simulations to estimate ES. In the video, I used historical returns to provide a clear, practical example by averaging the worst outcomes below the VaR threshold. Each method has its nuances, so choosing one depends on the specific requirements of your analysis and the data available.

[@hamidrezakamyabfar1829]

Thanks for sharing, It's my pleasure to find your channel. do you have or know any video to show the calculating VaR by ML models?

[@nenopower]

Thanks for sharing, indeed a goldmine, keep it up, cheers.

[@RyanOConnellCFA]

Thank you for that! You can count on my consistent uploads 💪

[@pedromizutanif]

Great video man!

[@RyanOConnellCFA]

I appreciate it!

[@cary8039]

Ryan: Using your spreadsheet SPY data, how would I calculate the expected shortfall for a one-week holding period rather than a one-day holding period? Is there a way to make your spreadsheet calculate the expected shortfall for SPY based on different holding periods input by the user?

[@RyanOConnellCFA]

Hey there. To calculate the expected shortfall for a one-week holding period, you can modify the spreadsheet to use weekly returns instead of daily returns. First, calculate the weekly returns by using the formula: (Price_t / Price_t-5) - 1, where Price_t is the closing price on day t, and Price_t-5 is the closing price 5 trading days prior. Then, sort the weekly returns from lowest to highest and determine the VaR levels for your desired confidence intervals based on the sorted data. Finally, calculate the expected shortfall by averaging all the weekly returns that fall below the respective VaR levels for each confidence interval. To make the spreadsheet more user-friendly and flexible, you can add an input cell where users can enter their desired holding period (e.g., 5 for one week, 21 for one month, etc.). Modify the return calculation formula to use the user-defined holding period instead of a fixed value, like this: (Price_t / Price_t-holdingPeriod) - 1. Ensure that the rest of the calculations (sorting, VaR levels, expected shortfall) reference the returns based on the user-defined holding period. This way, the spreadsheet will automatically calculate the expected shortfall for SPY based on the holding period specified by the user, making it a versatile tool for analyzing risk over various time frames.

[@wisemintapp]

This is fabulous!

[@RyanOConnellCFA]

Thank you Norman!

[@PandaPong]

Nice video!!!

[@PandaPong]

Credit risk made easy

[@RyanOConnellCFA]

Never thought I'd see you showing up in the comments Brian! Thank you

[@RyanOConnellCFA]

Also, its good to see you posting videos again. Keep it up!

[@cupcakedcs2617]

Thanks for the valuable video! One question for the z score, in case of the one sided Var then z score for 95% is 1.65 yes, but in case of the two sides it is 1.96. Could you advise me why we are taking 1 side z score? Even though we do have two tails in the graph. I want to get the concept which z score that I need to take with what intend and what situation

[@RyanOConnellCFA]

Your understanding is on the right track. Value at risk is a one-sided measure. The purpose of VaR is to estimate the maximum potential loss in value of a portfolio over a specified period for a given confidence level. Since we are concerned only with potential losses (left side tail) and not gains (right side tail), we focus on the left side of the distribution.

[@FenderAddict93]

@@RyanOConnellCFA So, is the assumption of "potential losses (left side tail) and not gains (right side tail)" is based on having long positions (or net long position of a portfolio) correct? Whereas on the flip side, short positions (or net short position of a portfolio) will assume potential losses (right side tail) and not gains (left side tail).

[@RyanOConnellCFA]

@@FenderAddict93 Whether you are short or long, you are only looking at the left side tail (the losses of your position). It doesnt matter if you are short or long, you are looking at losses. So first focus on calculating the returns of your position and then look at the losses on the left tail. This may require a sign change in your return calculation if you are short rather than long

[@FenderAddict93]

@@RyanOConnellCFA​​⁠ Thank you for the explanation. However, I still cannot wrap my head around it. In the video, you calculated CVaR based on the average Daily log returns beyond the VaR threshold. Using the 99% Confidence Interval example from the video, doesn’t it only mean that the S&P500 can potentially drop below the VaR with 1% probability and hence the expected drop in S&P500 price (or Daily log returns) is -4% if the 1% probability materialised? From my understanding, this means that the CVaR is calculating gains (left tail) by going short. Based on this, how do we go about calculating the loss (CVaR) for short positions on the right tail? Because changing the signs to find the ES of short positions would only produce an arbitrary number not based on the mean and stdev of the distribution.

[@nikhilvengaladas]

Goldmine for practical things 🫶🏻

[@RyanOConnellCFA]

Thank you for that Nikhil!