Tail risk - Revision history

Doug: Layout.

2025-01-02T01:35:33Z

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← Older revision		Revision as of 01:35, 2 January 2025
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	:Common false assumptions include:		:Common false assumptions include:

	: (1) normal distributions of possible outturns, and		:: (1) normal distributions of possible outturns, and

	: (2) historic data being representative of the future.		:: (2) historic data being representative of the future.


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	:In response to tail risk, Phil Aspin FCT advises:		:In response to tail risk, Phil Aspin FCT advises:

	: (a) Step back,		:: (a) Step back,

	: (b) Think through scenarios and		:: (b) Think through scenarios and

	: (c) “Have just a little bit more liquidity than the majority” of our peer organisations."		:: (c) “Have just a little bit more liquidity than the majority” of our peer organisations."

	:''Tail risk - ACT student treasury term of the month - August 2024.''		:''Tail risk - ACT student treasury term of the month - August 2024.''

Doug: Layout.

2025-01-02T01:34:29Z

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← Older revision		Revision as of 01:34, 2 January 2025
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	:"Tail risk is arguably the most important risk that treasurers manage. Tail risk is when a very bad thing happens, that was never supposed to happen.		:"Tail risk is arguably the most important risk that treasurers manage. Tail risk is when a very bad thing happens, that was never supposed to happen.

	Adequate liquidity can help survive a tail event. By definition, we never know when or where a tail event might hit or sting, making tail risk ever-topical.		:Adequate liquidity can help survive a tail event. By definition, we never know when or where a tail event might hit or sting, making tail risk ever-topical.


	Tail events are sometimes known as “fat tail” events, or black swans.		:Tail events are sometimes known as “fat tail” events, or black swans.

	Black swans and fat tails are warnings to consider potential scenarios in advance.		:Black swans and fat tails are warnings to consider potential scenarios in advance.


	Detailed quantitative risk modelling can lead to a false sense of assurance, if underlying assumptions are too simple.		:Detailed quantitative risk modelling can lead to a false sense of assurance, if underlying assumptions are too simple.

	Common false assumptions include:		:Common false assumptions include:

	: (1) normal distributions of possible outturns, and		: (1) normal distributions of possible outturns, and
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	Misusing artificial intelligence can further obscure these - and other - simplistic underlying assumptions we need to challenge.		:Misusing artificial intelligence can further obscure these - and other - simplistic underlying assumptions we need to challenge.

	In response to tail risk, Phil Aspin FCT advises:		:In response to tail risk, Phil Aspin FCT advises:

	: (a) Step back,		: (a) Step back,
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	== See also ==		== See also ==
			* [[Artificial intelligence]] (AI)
	* [[Bailout]]		* [[Bailout]]
	* [[Black swan]]		* [[Black swan]]

Doug: Add treasury student resource and quote - source - ACT student treasury term of the month.

2025-01-02T01:32:07Z

Add treasury student resource and quote - source - ACT student treasury term of the month.

← Older revision		Revision as of 01:32, 2 January 2025
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	:''Phil Aspin FCT, FTSE100 CFO, Chair of 100 Group Pensions Committee and former Group Treasurer.''		:''Phil Aspin FCT, FTSE100 CFO, Chair of 100 Group Pensions Committee and former Group Treasurer.''


			:<span style="color:#4B0082">'''''Tail risk - student treasury term of the month'''''</span>

			:"Tail risk is arguably the most important risk that treasurers manage. Tail risk is when a very bad thing happens, that was never supposed to happen.

			Adequate liquidity can help survive a tail event. By definition, we never know when or where a tail event might hit or sting, making tail risk ever-topical.


			Tail events are sometimes known as “fat tail” events, or black swans.

			Black swans and fat tails are warnings to consider potential scenarios in advance.


			Detailed quantitative risk modelling can lead to a false sense of assurance, if underlying assumptions are too simple.

			Common false assumptions include:

			: (1) normal distributions of possible outturns, and

			: (2) historic data being representative of the future.


			Misusing artificial intelligence can further obscure these - and other - simplistic underlying assumptions we need to challenge.

			In response to tail risk, Phil Aspin FCT advises:

			: (a) Step back,

			: (b) Think through scenarios and

			: (c) “Have just a little bit more liquidity than the majority” of our peer organisations."

			:''Tail risk - ACT student treasury term of the month - August 2024.''

Doug: Add link.

2024-07-20T11:16:23Z

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← Older revision		Revision as of 11:16, 20 July 2024
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	* [[Global Financial Crisis]] (GFC)		* [[Global Financial Crisis]] (GFC)
	* [[Hedge]]		* [[Hedge]]
			* [[Left tail]]
	* [[Leptokurtic frequency distribution]]		* [[Leptokurtic frequency distribution]]
	* [[Liquidity]]		* [[Liquidity]]

Doug: Add link.

2024-07-20T10:31:50Z

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← Older revision		Revision as of 10:31, 20 July 2024
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	Tail risk is the risk of adverse consequences from a 'tail event'.		Tail risk is the risk of adverse consequences from a 'tail event'.

	~~Financial~~ markets ~~tend~~ to have 'fat tails', meaning both the likelihood and the size of potential losses and other adverse consequences are systematically underestimated.		Tail risk is often known as ''fat-tail risk''.


			This name comes from financial markets outturns tending to have 'fat tails', meaning both the likelihood and the size of potential losses and other adverse consequences are systematically underestimated.


			This underestimation comes about from two modelling assumptions that are almost always wrong.

			These wrong assumptions are:

			:(1) Potential future events are ''normally distributed'', in a neat curve.

			:(2) The spread of the potential future events can be forecast with confidence by reviewing past events.


			The underestimation of the likelihood and the size of the events leads to inadequate risk management responses to address the adverse consequences.


			There is a refinement to the normal distribution assumption known as a lognormal distribution.

			However, this does not address the fat tail problem.


			Fat tail risk is also sometimes known as "black swan" risk.


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	* [[Chief Financial Officer]] (CFO)		* [[Chief Financial Officer]] (CFO)
	* [[Collateral]]		* [[Collateral]]
			* [[Confidence]]
	* [[Control]]		* [[Control]]
	* [[Credit loss]]		* [[Credit loss]]
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	* [[Monte Carlo analysis]]		* [[Monte Carlo analysis]]
	* [[Normal frequency distribution]]		* [[Normal frequency distribution]]
			* [[One tailed test]]
	* [[Peer]]		* [[Peer]]
	* [[Pension scheme]]		* [[Pension scheme]]
			* [[Post]]
	* [[Procyclicality]]		* [[Procyclicality]]
	* [[Risk management]]		* [[Risk management]]
	* [[Scenario planning]]		* [[Scenario planning]]
			* [[Significance testing]]
	* [[Standard deviation]]		* [[Standard deviation]]
	* [[Systemic risk]]		* [[Systemic risk]]
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	* [[Treasury risk]]		* [[Treasury risk]]
	* [[Trussonomics]]		* [[Trussonomics]]
			* [[Two tailed test]]
	* [[UK gilt crisis]]		* [[UK gilt crisis]]

Doug: Add links.

2024-07-18T09:55:22Z

Add links.

← Older revision		Revision as of 09:55, 18 July 2024
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	~~The~~ risk of adverse consequences from a 'tail event'.		''Risk management - treasury - rare events - financial markets.''

			Tail risk is the risk of adverse consequences from a 'tail event'.

	Financial markets tend to have 'fat tails', meaning both the likelihood and the size of potential losses and other adverse consequences are systematically underestimated.		Financial markets tend to have 'fat tails', meaning both the likelihood and the size of potential losses and other adverse consequences are systematically underestimated.
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	* [[Credit loss]]		* [[Credit loss]]
	* [[Fat tail]]		* [[Fat tail]]
			* [[Financial markets]]
	* [[Frequency distribution]]		* [[Frequency distribution]]
	* [[Gilts]]		* [[Gilts]]
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	* [[The 100 Group]] (100G)		* [[The 100 Group]] (100G)
	* [[Tipping point]]		* [[Tipping point]]
			* [[Treasury]]
			* [[Treasury risk]]
	* [[Trussonomics]]		* [[Trussonomics]]
	* [[UK gilt crisis]]		* [[UK gilt crisis]]

Doug: Add link.

2024-07-15T23:16:18Z

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← Older revision		Revision as of 23:16, 15 July 2024
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	* [[Pension scheme]]		* [[Pension scheme]]
	* [[Procyclicality]]		* [[Procyclicality]]
			* [[Risk management]]
	* [[Scenario planning]]		* [[Scenario planning]]
	* [[Standard deviation]]		* [[Standard deviation]]

Doug: Layout.

2024-07-14T22:29:15Z

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← Older revision		Revision as of 22:29, 14 July 2024
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	:Afterwards, there was much debate in the pension industry about what was the right amount of liquidity, with large schemes all having a similar level (and generally better than smaller schemes) based on advisor Monte Carlo analysis of historical rates performance.		:Afterwards, there was much debate in the pension industry about what was the right amount of liquidity, with large schemes all having a similar level (and generally better than smaller schemes) based on advisor Monte Carlo analysis of historical rates performance.

	:My advice is to have just a little bit more liquidity than the majority of others. That way you are on the right side of the systemic risk intervention.		:My advice is to have just a little bit more liquidity than the majority of others.

			:That way you are on the right side of the systemic risk intervention.


	:So the most important consideration on tail risk - is not crunching lots of detailed analysis - but rather to supplement this by stepping back and thinking through how things might play out."		:So the most important consideration on tail risk - is not crunching lots of detailed analysis - but rather to supplement this by stepping back and thinking through how things might play out."


	:''Phil Aspin FCT, FTSE100 CFO, Chair of 100 Group Pensions Committee and former Group Treasurer.''		:''Phil Aspin FCT, FTSE100 CFO, Chair of 100 Group Pensions Committee and former Group Treasurer.''

Doug: Add links.

2024-07-14T22:28:15Z

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← Older revision		Revision as of 22:28, 14 July 2024
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	* [[Standard deviation]]		* [[Standard deviation]]
	* [[Systemic risk]]		* [[Systemic risk]]
			* [[Tail]]
	* [[Tail event]]		* [[Tail event]]
			* [[Tailwinds]]
	* [[The 100 Group]] (100G)		* [[The 100 Group]] (100G)
	* [[Tipping point]]		* [[Tipping point]]

Doug: Layout.

2024-07-14T22:27:03Z

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← Older revision		Revision as of 22:27, 14 July 2024
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	:Generally 100 Group members came through unscathed. However many smaller schemes without robust liquidity positions had to close positions as rates headed up, and then suffered capital losses as rates came back down again when they were no longer hedged.		:Generally 100 Group members came through unscathed. However many smaller schemes without robust liquidity positions had to close positions as rates headed up, and then suffered capital losses as rates came back down again when they were no longer hedged.


	:Afterwards, there was much debate in the pension industry about what was the right amount of liquidity, with large schemes all having a similar level (and generally better than smaller schemes) based on advisor Monte Carlo analysis of historical rates performance.		:Afterwards, there was much debate in the pension industry about what was the right amount of liquidity, with large schemes all having a similar level (and generally better than smaller schemes) based on advisor Monte Carlo analysis of historical rates performance.