Kurtosis
Definition
A statistical measure of the 'tailedness' of a probability distribution — how extreme the outlier returns are compared to a normal distribution.
Explanation
Financial returns exhibit excess kurtosis (fat tails) — extreme events occur far more often than a normal distribution predicts. The stock market crash of 1987 (22.6% one-day decline) would be a 25-sigma event under normality — essentially impossible. In reality, financial 'fat tail' events happen every few years. Risk models that assume normal distributions systematically underestimate the probability and severity of extreme events. This is why VaR (which often assumes normality) understates tail risk.
How Stoquity Uses This
Stoquity incorporates kurtosis analysis across its portfolio management platform, providing real-time monitoring and AI-powered insights for every portfolio.