Sign up  |  Log in

Tail Risk Model Risk, What's the Difference?

Is one just a more general form for the other?

Also, can someone provide a definition of tail risk? I can’t find a good definition anywhere. The best I’ve got is:

“Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.”

But this raised the question that this thread is trying to address i.e. what the difference between tail risk and model risk is.

" Wiley's prep material was a huge part of my success." - Lindsey G., USA

Model risk is the risk that your model doesn’t accurately portray the behavior of an investment.

If you use a normal distribution to model an investment, then tail risk would also be model risk.

If you accurately model the investment behavior, but that behavior has a fat lower tail, then you’ll have tail risk without model risk.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Ah so tail risk inherently takes the normal distribution as the benchmark?

Atomic_Sheep wrote:
Ah so tail risk inherently takes the normal distribution as the benchmark?

Yup.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Schweet.