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Tail Value at Risk (TVaR)

Tail Value at Risk (TVaR), also known as Conditional Value at Risk (CVaR), is a risk measure that quantifies the expected loss in a portfolio or investment if a tail event occurs, beyond a specified confidence level. Unlike Value at Risk (VaR), which only measures the maximum loss within a certain probability, TVaR provides an estimate of the average loss given that a loss has exceeded the VaR threshold. TVaR is useful for understanding potential losses in extreme market conditions.

Example

If a portfolio has a 95% VaR of $1 million, the TVaR might be $2 million, meaning that in the worst 5% of cases, the average loss is expected to be $2 million or more.

Key points

• Measures the average expected loss beyond the VaR threshold.

• Provides a more comprehensive view of potential losses in extreme market conditions.

• Also known as Conditional Value at Risk (CVaR).

Quick Answers to Curious Questions

TVaR measures the average loss in extreme scenarios beyond the VaR threshold, while VaR only estimates the maximum loss within a certain confidence level.

It provides additional insight into the severity of losses during tail events, offering a fuller picture of extreme risks.

TVaR is used to evaluate the potential for extreme losses and to help hedge or allocate capital to mitigate the impact of severe market downturns.