What does Conditional VaR represent in financial risk measures?

Conditional VaR, also known as expected shortfall, represents the average of losses that exceed the Value at Risk (VaR) threshold within a specified confidence level. It focuses specifically on the tail of the loss distribution, which means it assesses the expected loss on the worst outcomes beyond the VaR point. Therefore, it provides a measure of the potential losses an investor could face in extreme market conditions, making it a more robust risk assessment tool compared to traditional VaR, which only indicates the maximum loss expected at a certain probability.

This characteristic of Conditional VaR is particularly useful for risk management as it considers the severity of potential losses, rather than merely the likelihood of losses occurring. In doing so, it helps investors and risk managers to understand the impact of extreme events on their portfolios and adjust their strategies accordingly to mitigate risks associated with those tail events.