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. 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.
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. 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.
- Kolmogorov's zero–one law which is also known as a Tail event.
- Risk measure
- Taleb distribution
- Value at risk
- Black swan theory
- Tail risk parity
- "Tail Risk Definition". Investopedia. Retrieved February 6, 2011.
- Vineer Bhansali (December 2008). "Tail Risk Management: Why Investors Should Be Chasing Their Tails". PIMCO. Retrieved 30 March 2017.
- Ken Akoundi; John Haugh. "Tail Risk Hedging: A Roadmap for Asset Owners" (pdf). Deutsche Bank. Retrieved June 16, 2012.
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