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Concept
Tail value at risk
Summary
Tail value at risk (TVaR), also known as tail conditional expectation (TCE) or conditional tail expectation (CTE), is a risk measure associated with the more general value at risk. It quantifies the expected value of the loss given that an event outside a given probability level has occurred.
There are a number of related, but subtly different, formulations for TVaR in the literature. A common case in literature is to define TVaR and average value at risk as the same measure. Under some formulations, it is only equivalent to expected shortfall when the underlying distribution function is continuous at , the value at risk of level . Under some other settings, TVaR is the conditional expectation of loss above a given value, whereas the expected shortfall is the product of this value with the probability of it occurring. The former definition may not be a coherent risk measure in general, however it is coherent if the underlying distribution is continuous. The latter definition is a coherent risk measure. TVaR accounts for the severity of the failure, not only the chance of failure. The TVaR is a measure of the expectation only in the tail of the distribution.
The canonical tail value at risk is the left-tail (large negative values) in some disciplines and the right-tail (large positive values) in other, such as actuarial science. This is usually due to the differing conventions of treating losses as large negative or positive values. Using the negative value convention, Artzner and others define the tail value at risk as:
Given a random variable which is the payoff of a portfolio at some future time and given a parameter then the tail value at risk is defined by
where is the upper -quantile given by . Typically the payoff random variable is in some Lp-space where to guarantee the existence of the expectation. The typical values for are 5% and 1%.
Closed-form formulas exist for calculating TVaR when the payoff of a portfolio or a corresponding loss follows a specific continuous distribution.
Official source
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