What is tail risk in finance?
In statistics, the “tails” of the return distribution are extreme outcomes at either end of the bell curve – events that are rare, but when they do occur, are far larger in magnitude than the everyday volatility (“standard deviation”). Tail risk specifically refers to the left tail: severe risk negative Return. Standard portfolio models often assume that asset returns follow a normal distribution. In practice, financial markets exhibit what statisticians call “fat tails” – meaning extreme events (some of them known as “black swans”). More often, with more seriousnesscompared to model predictions. The 2008 global financial crisis (GFC), the 2020 COVID-19 crash, and the dot-com collapse of 2000–2002 were all, in theory, statistical outliers. In practice, each of them has occurred in the same working lifetime. In the Asian context, an example of a statistical externality is the 1997…
