Extreme Risk Analysis

Risk analysis involves gaining deeper insight into the sources or risk and evaluating whether these risks accurately reflect the views of the portfolio manager.  In this paper we show how to extend standard volatility analytics to shortfall, a measure of extreme risk.  Using two examples, we show how shortfall provides a more complete and intuitive picture of risk than value at risk.  In two subsequent examples we illustrate the additional perspective offered by analyzing short-fall and volatility in tandem.

Authors: Lisa Goldberg, Ph.D., MSCI, Jose Menchero, Ph.D., CFA, MSCI, Michael Hayes, Ph.D., MSCI, and Indrajit Mitra, Ph.D., MIT