Value-at-Risk and Expected Shortfall - Managing risk for an equity portfolio

Abstract

This thesis intends to examine a risk measure used for estimating a potential future loss. The risk measure Value-at-Risk, is widely used throughout the world of financial risk management. We will examine different approaches to computing Value-at-Risk for two equity portfolios, one univariate portfolio and one multivariate portfolio. We assume that portfolio losses have a certain distribution. Even though Value-at-Risk is widely used and accepted within financial management, Value-at-Risk is not a coherent risk measure. We will therefore include another risk measure in our thesis, the so-called Expected Shortfall. What we find is that our assumption considering portfolio losses are not valid for all methods of computing Value-at-Risk. Methods investigated in this thesis are not suitable for capturing more extreme losses that occur during periods of market turbulences.