The tendency of variables to move together in the extremes more than in normal times. A normal-based dependence structure does not capture it.
Where you will meet it
Tail dependence comes up in 3 learning outcome notes across the FRM syllabus.
A few of them:
Portfolio Credit Risk FRM Part II · Credit risk measurement and management
“Correlation is a single linear summary, so it cannot describe tail dependence.”
Parametric Approaches (II): Extreme Value FRM Part II · Market risk measurement and management
“It then models the dependence between extremes separately, for example with an extreme value copula or a tail dependence coefficient.”
Market-Driven Scenarios: An Approach for Plausible Scenario Construction FRM Part II · Risk management and investment management
“This is a linear, model-based approximation from the historical covariance matrix, not tail dependence, and stressed dependence is a separate choice made by shocking correlations explicitly.”
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