Risk management with expected shortfall

This article studies optimal, dynamic portfolio and wealth/consumption policies of expected utility-maximizing investors who must also manage market-risk exposure which is measured by expected shortfall (ES). We find that ES managers can incur larger losses when losses occur, compared to benchmark managers. A general-equilibrium analysis reveals that the presence of ES managers increases the market volatility during periods of significant financial market stress. We propose weighted shortfall, a coherent and moreover spectral risk measure, that can rectify the shortcomings of ES.