jaantollander / ConditionalValueAtRisk

Provides a concrete Julia implementation for computing the conditional value-at-risk (aka expected shortfall) for discrete probability distributions. Also works as a pseudocode for other languages.

Conditional Value-at-Risk

You can copy The Julia code from the file conditional-value-at-risk. The example below describes the implementation and how to use it. This repository is related to my article Measuring Tail-Risk Using Conditional Value at Risk, which discusses the definition, properties and implementation of conditional value at risk in more detail.

We can implement the value-at-risk and conditional value-at-risk functions in Julia for discrete probability distributions as follow.

"""Value-at-risk."""
function value_at_risk(x::Vector{Float64}, f::Vector{Float64}, α::Float64)
    i = findfirst(p -> p≥α, cumsum(f))
    if i === nothing
        return x[end]
    else
        return x[i]
    end
end

"""Conditional value-at-risk."""
function conditional_value_at_risk(x::Vector{Float64}, f::Vector{Float64}, α::Float64)
    x_α = value_at_risk(x, f, α)
    if iszero(α)
        return x_α
    else
        tail = x .≤ x_α
        return (sum(x[tail] .* f[tail]) - (sum(f[tail]) - α) * x_α) / α
    end
end

Let us create a random discrete probability distribution.

normalize(v) = v ./ sum(v)
scale(v, low, high) = v * (high - low) + low
n = 10
x = sort(scale.(rand(n), -1.0, 1.0))
f = normalize(rand(n))
α = 0.05

Next, we assert that the inputs are valid. Note that the states x do not have to be unique for the formulation to work.

@assert issorted(x)
@assert all(f .≥ 0)
@assert sum(f) ≈ 1
@assert 0 ≤ α ≤ 1

Then, executing the function in Julia REPL gives us a result.

julia> conditional_value_at_risk(x, f, α)
-0.9911100750623101