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By John A. Robb

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Fat Tail Distribution

A fat tail is a property of some probability distributions (alternatively referred to as heavy-tailed distributions) exhibiting extremely large kurtosis particularly relative to the ubiquitous normal which itself is an example of an exceptionally thin tail distribution. The term fat tail is a reference to the tendency of many financial instrument price and return distributions to have more observations in the tails and to be thinner in the midrange than a normal distribution. Assets prone to price jumps tend to exhibit fat-tailed distributions.

Fat tail distributions have power law decay. Some reserve the term "fat tail" for distributions only where 0 < a < 2 (i.e. only in cases with infinite variance).

Sample Fat Tail Distribution Graph

Copyright (c) John A. Robb 2008. Just for fun: Anklet Theory