Tail risk
Tail risk, sometimes called "fat tail risk," is the financial risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price, above the risk of a normal distribution. Prudent asset managers are typically cautious with tail risk involving losses which could damage or ruin portfolios, and not the beneficial tail risk of outsized gains.
The common technique of theorizing a normal distribution of price changes underestimates tail risk when market data exhibit fat tails.
Tail risk is sometimes defined less strictly: as merely the risk of rare events. The arbitrary definition of the tail region as beyond 3 standard deviations may also be broadened, such as the SKEW index which uses the larger tail region starting at 2 standard deviations.
