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What is a Fat Tail Distribution?
Fat tail distributions differ from the common “bell-shaped” normal distribution curve in that they have much wider tails (“fat tails”). Large movements in data points are more common in data series that exhibits fat tails than a data series exhibiting a normal bell-shaped curve. As such, a problem with return-series that exhibit fat tail distributions is that traditional risk management approaches that utilize normal distribution curve assumptions may underestimate the probability of large movements in price.