Information and Financial Economics - What is Tail End Risk?

Tail end risk is the risk of extreme events occurring at the end of a distribution of possible outcomes. These events are typically low probability events but can have a significant impact if they do occur. Tail end risk is also sometimes referred to as "tail risk."

Examples of tail end risk include:

• Financial market risk: Financial markets are subject to tail end risk because of the possibility of extreme events, such as market crashes or financial crises.
• Natural disasters: Natural disasters, such as earthquakes, hurricanes, and tsunamis, are examples of tail end risk because they are low probability events but can have a significant impact if they occur.
• Pandemics: Pandemics, such as the COVID-19 pandemic, are also examples of tail end risk because they are rare events but can have significant consequences if they occur.
• Terrorism: Terrorism is another example of tail end risk because it is a low probability event but can have a significant impact if it occurs.

Tail end risk can be difficult to manage because it is difficult to predict when these events will occur and how severe their impact will be. As a result, risk management strategies for tail end risk often involve measures to reduce the impact of the event, such as insurance or diversification of assets.