Outliers and Fat Tails in Financial Returns

Flashcards about outliers, normal and Cauchy distributions, fat tails, and stock market events since 1928

Normal Distribution

A typical distribution for random variables in nature, characterized by its mean and standard deviation.

Right Tail

High values of a random variable in a distribution.

Left Tail

Low values of a random variable in a distribution.

Fat-tailed Distribution

A distribution with tails that do not trail off to zero as quickly as a normal distribution, leading to more frequent extreme values.

Cauchy Distribution

A type of distribution with fat tails

Central Limit Theorem

A large averages of a large number of independent identically distributed shocks or random variables is approximately normally distributed.

Black Swan Events

Rare and unexpected events with a major impact.

Stock Market Crash

October 19, 1987, when the stock market fell 20.477% in one day.

Outlier

Values far from the mean are more probable than in a normal distribution