Mesokurtic

What Is a Mesokurtic Distribution?

Mesokurtic is a statistical term used to describe the outlier characteristic of a probability distribution in which extreme events (or data that are rare) is close to zero. A mesokurtic distribution has a similar extreme value character as a normal distribution.

Kurtosis is a measure of tails, or extreme values, of a probability distribution. With greater kurtosis, extreme values (for example, values that are five or more standard deviations from the mean) occasionally occur.

How Mesokurtic Distributions Work

Distributions may be described as mesokurtic, platykurtic, or leptokurtic. Mesokurtic distributions have a kurtosis of zero, meaning that the probability of extreme, rare, or outlier data is close to zero. Mesokurtic distributions have the same kurtosis as that of the normal distribution, or normal curve, also known as a bell curve.

In contrast, a leptokurtic distribution has fatter tails. This means that the probability of extreme events is greater than that implied by the normal curve. Meanwhile, platykurtic distributions, on the other hand, have lighter tails, and the probability of extreme events is lesser than that implied by the normal curve. In finance, the probability of an extreme event that is negative is called "tail risk."

Risk managers also must be concerned about probability distributions with "long tails." In a distribution with a long tail, the probability of a highly extreme event is non-negligible.

Kurtosis is an important concept in finance because it affects risk management. Investment returns are assumed to be distributed normally, that is, to be distributed in a normal, bell-shaped curve. In reality, returns fall into a leptokurtic distribution, with "fatter tails" than the normal curve.

This means that the probability of large losses or large gains is greater than would be expected if returns matched a normal curve. Generally, more risk-averse investors tend to prefer assets and markets with platykurtic distributions, since those assets are less likely to produce extreme results.