What is a fat tailed event?

As William Safire notes in his etymology of the term, a fat tail occurs when there is an unexpectedly thick end or “tail” toward the edges of a distribution curve, indicating an irregularly high likelihood of catastrophic events.

What are fat tails statistics?

The statistical term ‘fat tails’ refers to probability distributions with relatively high probability of extreme outcomes. Fat tails also imply strong influence of extreme observations on expected future risk.

What causes fat tail distribution?

Understanding Tail Risk The fat tails indicate that there is a probability, which may be larger than otherwise anticipated, that an investment will move beyond three standard deviations. Distributions that are characterized by fat tails are often seen when looking at hedge fund returns, for example.

What does a fat tailed distribution look like?

A heavy tailed distribution has tails that are heavier than an exponential distribution (Bryson, 1974). In other words, the tails simply look fatter. As the tails have more bulk, the probability of extreme events is higher compared to the normal.

Why is it called a fat tail?

These models are colloquially called ‘fat-tails,’ because if you compare their density function to that of the Gaussian, the areas away from the middle, aka the tails, are much more pronounced.

What is a long tail event?

In statistics and business, a long tail of some distributions of numbers is the portion of the distribution having many occurrences far from the “head” or central part of the distribution. The distribution could involve popularities, random numbers of occurrences of events with various probabilities, etc.

Which kurtosis has fat tails?

Leptokurtic distributions are statistical distributions with kurtosis greater than three. It can be described as having a wider or flatter shape with fatter tails resulting in a greater chance of extreme positive or negative events. It is one of three major categories found in kurtosis analysis.

What are tail events?

Noun. tail event (plural tail events) (probability) an event associated with a given infinite sequence that is determined by any subsequence of the form (a “tail” of that sequence) a low-probability event quotations ▼ an event that initiates an activity.

What is a distribution tail?

The “tails” of a distribution are, just like the name suggests, the appendages on the side of a distribution. Although it can apply to a set of data, it makes more sense if that data is graphed, because the tails become easily visible.

What is long tail example?

Classic examples of Long Tail businesses include Amazon and Netflix. In addition to online retailers you will also find Long Tail businesses in micro finance and insurance to name just two industries.

What is an example of a tail event?

The financial crisis of 2007/08 was a tail event. Coronavirus was a tail event. Many of the every day products you use, services you engage with and companies you work for are tail events. So, yes, tail events are rare but when they happen their impact is huge.

Is exponential distribution fat tailed?

Relationship to fat-tailed distributions Some distributions, however, have a tail which goes to zero slower than an exponential function (meaning they are heavy-tailed), but faster than a power (meaning they are not fat-tailed).