Tail Risk

Tail risk is the risk of extreme outcomes — especially large losses — that live in the “tails” of a return distribution.

It’s different from everyday noise. Two assets can have similar volatility and still have very different “crash behavior.”

Tail risk vs volatility

Volatility is an average measure of dispersion. Tail risk is about what happens on the worst days:

• How bad are losses once we’re already in the left tail?
• Do “impossible” moves happen more often than a normal distribution would predict?
• Do two assets melt down together in stress?

How we measure tail risk at Gale Finance

We use a few different metrics (and link each one out to the full definition):

1. Bad-day cutoff: Value at Risk (VaR) answers “what loss threshold marks the worst 5% of days?”

2. Average loss in the tail: Expected Shortfall (CVaR) answers “if we hit a tail day, what’s the average damage?”

3. Shape of the return distribution: skew (direction) and kurtosis (tail heaviness).

4. Tail day counts: z-scores / tail days count how often returns are unusually large relative to the window.

5. Crash-together risk: tail dependency asks whether two assets tend to be down together on bad days.

If you’re trying to understand why an asset is tail-risky, also read fat tails.

How to read our tail-risk sections

On compare pages and scorecards:

• Start with Expected Shortfall if you care about “how bad is bad.”
• Use VaR as a quick cutoff benchmark (it’s simpler, but it hides what happens beyond the threshold).
• Use tail dependency if your question is diversification under stress.