systemic risk

Systematic Risk

Systematic risk refers to risk that affects the entire investment market, rather than the risk associated with a particular investment. Systematic risk is caused by external, or macroeconomic, factors. It is often measured by calculating the volatility of an asset or portfolio. Volatility is a measure of how much the value of an asset or portfolio changes over time. Systematic risk can also be reduced by diversification, which is spreading ones investments across different asset classes.

Systematic risk is also known as market risk, or non-diversifiable risk. It is the risk that cannot be eliminated by diversifying a portfolio. This type of risk is caused by macroeconomic factors, such as the overall state of the economy, political changes, natural disasters, or other external influences. For example, if a countrys exchange rate decreases due to a political event, it will have an effect on the value of investments in that country, even if the individual company or investment did not cause the event.

Systematic risk can also be caused by specific industries or sectors. For example, if an automobile company declares bankruptcy, it could cause all stocks related to the auto industry to fall in value. Systematic risk is different from unsystematic risk, which is a specific risk associated with a particular issuer or sector. Unsystematic risk can be mitigated by diversification, while systematic risk cannot.

Systematic risk can be divided into two categories: business cycle risk and event risk. Business cycle risk is the risk of significant movements in the aggregate investments of all businesses in the economy. This could include recessions, upturns, and downturns. Event risk involves large, unexpected events that can cause broad movements in the market such as a terrorist attack, international crisis, or natural disaster.

In order to limit the effects of systematic risk, investors can take steps to reduce their exposure. They can use hedging strategies such as buying and selling derivatives, commodities, or currencies. They can also diversify their investments by investing in a variety of asset classes. Diversification reduces the impact that any single event or factor could have on the investors portfolio.

No investment strategy can guarantee a return, and all investments are subject to risk. Systematic risk is a particular type of risk that affects all investments in the market, and it is impossible to eliminate. However, by understanding the sources of risk, investors can develop effective strategies to limit their exposure to it and maximize their potential for profitable returns.

Systemic risk refers to the risk of failure of the entire financial system or the entire market without any direct cause. It is a kind of comprehensive risk that has a deep impact on the financial system and economic system, which is generated by the uncertainty of the internal or external factors of the financial system and cannot be controlled in the macro environment.

Systemic risk usually originates from three aspects. Firstly, it evolves from the structure and mechanism of financial system, such as the credit connection of financial institutions, the complexity of the capital structure and the lack of institutionalization. Secondly, it can be derived from the imperfect risk management system, such as the lack of regulatory bodies, the weaknesses in market monitoring and the absence of relevant laws and regulations. Finally, it is linked to the macroeconomic situation, such as economic downturn, policy change, over-heating, technological advancement and social changes.

As one of the main risks of the financial system, the impact of systemic risk has become increasingly evident. It can cause tremendous economic losses and social turmoil, even leading to systemic crisis and bankruptcy. Importantly, systemic risk is difficult to identify and forecast in advance, making it difficult to deal with. Therefore, it must be noted that enhancing the power of regulators, diversifying financial institutions, improving corporate governance and strengthening macroprudential supervision are essential to guard against systemic risk.