Key points
- Large daily falls happen far more often than a normal (bell-curve) distribution predicts.
- Tail risk rises during uncertainty, geopolitical stress or liquidity crises.
- Investors pay for protection (put options, VIX futures) as insurance.
Example
Under a normal distribution with typical daily volatility, a one-day fall of 20% should essentially never happen. The S&P 500 fell 20.5% on 19 October 1987.
In history
In March 2020 the S&P 500 moved more than 5% on eight separate days. On Black Monday in 1987 the Dow fell 22.6% in a single day.
Related terms