Tail risk
What is the chance of a move so large that ordinary weeks never show it, and how do traders see it coming?
In plain words
Tail risk is the risk of a rare, very large price move, far bigger than the day-to-day swings a market usually produces. Traders estimate it from past extremes and from how prices behave in unusual conditions, because typical weeks contain little evidence of it.
Why it matters
Losses in the tail can exceed what a position sized on normal weeks can absorb. Since ordinary volatility data rarely captures these moves, exposure calibrated only to recent weeks can fail precisely when the market is most stressed.
In a real week: BTC, week of 21 October 2019
In the week of 21 October 2019, BTC ranged 42.05% between its low of 7300.0 on Wednesday and high of 10370.0 on Saturday, with an 8.99% move within one hour. Realised volatility reached 118.9% annualised and the best day rose 16.76%. Volume was 1.76 times its prior 12-week average, marking the week as exceptional.
A common mistake
Judging tail risk only from recent volatility. A calm stretch can mask the size of moves that occur rarely but dominate overall losses.