Tail risk

The risk of rare, extreme losses far from the centre of the distribution. It is the focus of expected shortfall and stress testing.

Where you will meet it

Tail risk comes up in 6 learning outcome notes across the FRM syllabus. A few of them:

• Credit Risk Transfer Mechanisms
  FRM Part I · Foundations of risk management

  “Retaining senior tranches or re-securitizing carries concentrated tail risk, plus liquidity risk when funded short-term.”

• Sample Moments
  FRM Part I · Quantitative analysis

  “For n variables there are C(n + k − 1, k) distinct moments of order k, counting the single-variable ones, which matters for portfolio tail risk.”

• Measuring and Monitoring Volatility
  FRM Part I · Valuation and risk models

  “Tail risk needs stress testing, heavier-tailed distributions, historical or simulated tails, or models of time-varying volatility.”

• Global Financial Stability Report, Chapter 2
  FRM Part II · Current issues in financial markets

  “The wedge indicates priced tail risk and is not a price by itself.”

See also

Expected shortfall · Stress testing

All terms beginning with T · FRM glossary

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