Why expected shortfall replaced VaR in the trading book

Sep 14, 2026, filed under risk · part of VaR/ES risk engine

VaR answers one question: what loss is exceeded only $\alpha$ of the time? It says nothing about how bad things get past that point, and it isn’t subadditive, so a merged portfolio can report more risk than its parts.

Definition

\ES_\alpha = \E[\, L \mid L \ge \VaR_\alpha \,]

Expected shortfall averages the tail instead of pointing at its edge. It is coherent, which is the main reason Basel’s FRTB moved to 97.5% ES.

Cost

ES is harder to backtest, because it isn’t elicitable on its own. Joint VaR–ES scoring functions are the usual workaround.