Do stock returns have fat tails?
Stock market returns tend to follow a normal distribution that has excess kurtosis. The normal distribution curve has a kurtosis equal to three and, therefore, if a security follows a distribution with kurtosis greater than three, it is said to have fat tails.
Does Platykurtic have fat tails?
Types of Excess Kurtosis When the value of an excess kurtosis is negative, the distribution is called platykurtic. This kind of distribution has a tail that’s thinner than a normal distribution. The tails on this distribution is heavier than that of a normal distribution, indicating a heavy degree of risk.
Can a normal distribution have a fat tail?
We all know that normal distribution does not have a fat-tail. Instead, we were taught to use the student-t distribution and log normal distribution when modelling the financial return series to take into account the ‘fat-tail’ property.
Do you know the definition of fat tail?
Instead, we were taught to use the student-t distribution and log normal distribution when modelling the financial return series to take into account the ‘fat-tail’ property. But we need to know the definition of fat tail. Unfortunately, there is no universal definition for the term fat.
Do you need to be aware of fat tail risk?
Being aware of extreme events associated with fat tails is not enough to protect an investment from economic turmoil. The ideal portfolio will not only generate a good return for each unit of volatility, but will also provide some assurance against tail risk.
Why are hedging strategies have fatter tails?
Hedging strategies can often have some short term costs, but over time they are designed to mitigate losses and provide liquidity during crises. In the post crisis era, it is becoming accepted that financial asset returns exhibit fatter tails than normal distributions.