The advantage of performing a simulation is that different tail risk measures can be computed from the simulated loss distribution.

Hence, under tail risk, excess risk-shifting incentives of bank shareholders may exist almost independently of the level of initial or required capital.

Given this backdrop and these fears, “tail risk” hedging, or protecting investment portfolios against extreme negative moves in the market, has been a frequent topic of conversation among market participants.

Not making this distinction between normal risk and extreme tail risk is often the reason institutions lack clear, highly focused goals and governance policies for the management of tail risk.

Tail risk

Meaning

Noun