Advanced Risk Management - Tail Risk and Black Swan Events
These are rare, unpredictable events that can cause massive losses — and standard models often underestimate them.
Tail Risk
- Refers to the small chance of extreme events at either end of a return distribution.
- Examples: Market crashes, hyperinflation, geopolitical war.
- Traditional models assume "normal" bell-curve risk — tail risks break that assumption.
Black Swan Events (term by Nassim Taleb)
- Rare, extreme, and unpredictable events with major impact.
Examples:
- 2008 Financial Crisis
- COVID-19 pandemic
- 9/11 attacks
- Sudden crypto exchange collapse (e.g., FTX)
These events can't be predicted, but you can prepare.