tail risk meaning: definition, etymology and quotations

tail risk

noun

Etymology From statistics, referring to the end-portion (“tail”) of distribution curves, in finance usually the left (“loss”) tail.

Business, Finance The probability that the value of something will fall more than three standard deviations (-3σ) below the mean; an extreme risk.

The advantage of performing a simulation is that different tail risk measures can be computed from the simulated loss distribution.2004, Srichander Ramaswamy, Managing Credit Risk in Corporate Bond Portfolios, →ISBN, page 123:
Hence, under tail risk, excess risk-shifting incentives of bank shareholders may exist almost independently of the level of initial or required capital.2011, International Monetary Fund, Capital Regulation and Tail Risk, →ISBN, page 4:

4 more examples

Given this backdrop and these fears, “tail risk” hedging, or protecting investment portfolios against extreme negative moves in the market, has been a frequent topic of conversation among market participants.2012 April 20, Alan Gerstein, “The Challenges in Hedging Tail Risk”, in The New York Times:
Not making this distinction between normal risk and extreme tail risk is often the reason institutions lack clear, highly focused goals and governance policies for the management of tail risk.2013, Paul Karamjeet, Managing Extreme Financial Risk, →ISBN, page xxii:
There is also a growing literature on the empirical regularities of cryptocurrencies. Borri (2019) shows that individual cryptocurrencies are exposed to cryptomarket tail-risks. Makarov and Schoar (2020) find that cryptocurrency markets exhibit periods of potential arbitrage opportunites across exchanges. Griffin and Shams (2020) study Bitcoin price manipulation. Our paper is the first comprehensive analysis of cryptocurrencies through the lens of empirical asset pricing.2021, Yukun Liu, Aleh Tsyvinski, “Risks and Returns of Cryptocurrency”, in The Review of Financial Studies, volume 34, number 6, page 2690 of 2689–2727:
Because really, if we can’t deal with catastrophic tail risk, then we do not have a legitimate government.2025 November 14, Kevin Roose, Casey Newton, quoting Dean Ball, “Data Centers in Space + A.I. Policy on the Right + A Gemini History Mystery”, in The New York Times, New York, N.Y.: The New York Times Company, →ISSN, →OCLC:

Related terms: black swan, long tail