Conditional Value-at-Risk for General Loss Distributions

Fundamental properties of conditional value-at-risk, as a measure of risk with significant advantages over value-at-risk, are derived for loss distributions in finance that can involve discreetness. Such distributions are of particular importance in applications because of the prevalence of models based on scenarios and finite sampling. Conditional value-at-risk is able to quantify dangers beyond value-at-risk, and moreover it is coherent. It provides optimization shortcuts which, through linear programming techniques, make practical many large-scale calculations that could otherwise be out of reach. The numerical efficiency and stability of such calculations, shown in several case studies, are illustrated further with an example of index tracking.

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