Tail risk

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Tail risk is the additional risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price, above the risk of a normal distribution.[1] Prudent asset managers are typically cautious with tail risk involving losses which could damage or ruin portfolios, and not the beneficial tail risk of outsized gains.[2]

The common technique of theorizing a normal distribution of price changes underestimates tail risk when market data exhibit fat tails.

Tail risk is sometimes defined less strictly, as merely the risk (or probability) of rare events.[3] The arbitrary definition of the tail region as beyond 3 standard deviations may also be broadened, such as the SKEW index which uses the larger tail region starting at 2 standard deviations.

See also[edit]

References[edit]

  1. ^ "Tail Risk Definition". Investopedia. Retrieved February 6, 2011. 
  2. ^ Vineer Bhansali (December 2008). "Tail Risk Management: Why Investors Should Be Chasing Their Tails". PIMCO. Retrieved 30 March 2017. 
  3. ^ Ken Akoundi; John Haugh. "Tail Risk Hedging: A Roadmap for Asset Owners" (pdf). Deutsche Bank. Retrieved June 16, 2012.