tail risk
Unlikely catastrophic outcome
Tail risk refers to the probability of rare, extreme events occurring at the far ends of a statistical distribution—outcomes that standard models often underestimate.
In finance, tail risk describes the chance of catastrophic losses that lie beyond normal market fluctuations: The fund collapsed because they hadn't hedged for tail risk.
The term comes from the thin "tails" at either end of a bell curve, where unlikely but consequential events cluster.
Dark-feathered Australian waterfowl
- market crashSudden market decline
- financial crisisSevere economic system breakdown
- meltdownCatastrophic loss of control
- collapseSudden structural failure
contagion · flash crash · liquidity crisis · currency crisis · bank run · credit crunch · dot-com crash · housing bubble
Distant data point
- distributionAllocation across recipients
- standard deviationSpread around the mean
- varianceSpread around the mean
- probabilityQuantified chance of occurrence
power law · normal distribution · percentile · confidence interval · skewness · stress testing · quantile
Evaluating capacity under extreme conditions
- exposureState of being unprotected
- contingency planningPreparing for possible problems
- worst-caseMost unfavorable outcome imaginable
- backtestingValidating strategies using history
early warning · drawdown · disaster recovery · circuit breaker · unknown unknowns · fat finger · antifragility
Available courses of action
- derivativesThings derived from another
- put optionsContracts to sell at set prices
- credit default swapContract paying if bonds fail
- insuranceContractual risk coverage
stop-loss · diversification · hedge fund · safe haven · gold · treasuries · convexity · reinsurance
black swan
Dark-feathered Australian waterfowl
- market crashSudden market decline
- financial crisisSevere economic system breakdown
- meltdownCatastrophic loss of control
collapse · contagion · flash crash · liquidity crisis · currency crisis · bank run · credit crunch · dot-com crash · housing bubble · debt spiral
outlier
Distant data point
- distributionAllocation across recipients
- standard deviationSpread around the mean
- varianceSpread around the mean
probability · power law · normal distribution · percentile · confidence interval · skewness · stress testing · quantile
stress testing
Evaluating capacity under extreme conditions
- exposureState of being unprotected
- contingency planningPreparing for possible problems
- worst-caseMost unfavorable outcome imaginable
backtesting · early warning · drawdown · disaster recovery · circuit breaker · unknown unknowns · fat finger · antifragility
options
Available courses of action
- derivativesThings derived from another
- put optionsContracts to sell at set prices
- credit default swapContract paying if bonds fail
insurance · stop-loss · diversification · hedge fund · safe haven · gold · treasuries · convexity · reinsurance
- market risksmarket crash, market volatility, market correction, market panic, volatility
- Risk Metricsbacktesting, stress testing
- tail distributionspower law, extreme events
- Volatilityvolatility, fluctuation, fluctuations, instability, unpredictability
- long tailniche markets, niche products, rare items, power law, demand curve
tail riskcentral tendency
Data's typical value
expected value · standard deviation · normal variation · base rate
risk, tail, risky, tailor, tails, risked, tailored, risking, riskiness