Risk
Fat tails
Also called Tail risk
The tendency of extreme market moves to happen far more often than standard statistics predict.
How it works
Return distributions have more weight in their extremes than a bell curve. Crashes, gaps and manias are not anomalies in the data; they are a feature of it.
The practical consequence is that risk models calibrated on normal conditions understate what can happen, and they understate it most in exactly the conditions where the number is being relied on.
Related terms
- Normal distributionThe symmetric bell-shaped curve that much of finance assumes returns follow.
- Black swanA rare, high-impact event that was not predicted and is explained confidently afterwards.
- Value at riskAn estimate of the most you would expect to lose over a period, at a stated confidence level.
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
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