“Fat-tail risks” are risks with low probability but potentially massive impact. In statistics, a normal distribution assumes that all values in a sample are evenly distributed above and below the mean and there is only a 0.3% chance of an extreme event occurring.
Many financial models have a normal distribution as a starting point. However, the market is far from perfect and is heavily influenced by unpredictable human behavior. This is why disruptive events that should occur only very sporadically happen relatively more often than you would expect.
What are today’s largest geopolitical fat-tail risks that investors and policymakers should worry about?
The Gaza War
There are plausible avenues towards escalation of the Gaza war that could have global financial-economic repercussions. Iran claims it does not want a regional war while having one or more fingers in the Syria, Iraq,…
