Tail risk

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Tail risk is the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price.[1] In particular, most asset managers are only interested in the downside risk, i.e. moving more than 3 standard deviations below its current price.[2]

The common technique of using a normal approximation to estimate the distribution of changes in price will underestimate the true value for tail risk due to fat tails in financial data.

Tail risk is sometimes defined less strictly, as merely the risk (or probability) of rare events.[3]

See also[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 June 16, 2012. 
  3. ^ Ken Akoundi; John Haugh. "Tail Risk Hedging: A Roadmap for Asset Owners" (pdf). Deutsche Bank. Retrieved June 16, 2012.