Fat tail
TheoryDefinition
A statistical distribution where extreme events occur more frequently than predicted by a normal (Gaussian) bell curve. Asset returns are famously fat-tailed — "10-sigma" events happen roughly once a decade.
Risk models built on Gaussian assumptions (VaR, much of bank risk management) systematically underestimate extreme losses. The 2007-2008 GFC was a vivid demonstration of fat-tail risk.
Risk models built on Gaussian assumptions (VaR, much of bank risk management) systematically underestimate extreme losses. The 2007-2008 GFC was a vivid demonstration of fat-tail risk.