Tail risk
Encyclopedia
Tail risk is the risk of an asset or portfolio of assets moving more than 3 standard deviations
from its current price in a probability density
function. This is often under estimated using normal statistical methods for calculating the probability of changes in the price of financial assets.
The normal distribution which can be used for calculating the probability of sudden asset price changes is particularly prone to this type of error. However, many if not most types of analysis are prone to this error to a lesser scale.
Standard deviation
Standard deviation is a widely used measure of variability or diversity used in statistics and probability theory. It shows how much variation or "dispersion" there is from the average...
from its current price in a probability density
Probability density
Probability density may refer to:* Probability density function in probability theory* The product of the probability amplitude with its complex conjugate in quantum mechanics...
function. This is often under estimated using normal statistical methods for calculating the probability of changes in the price of financial assets.
The normal distribution which can be used for calculating the probability of sudden asset price changes is particularly prone to this type of error. However, many if not most types of analysis are prone to this error to a lesser scale.