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Systemic risk
From Wikipedia, the free encyclopedia.

A systemic risk is a risk faced by a system, in contrast to a specific risk or unique risk. In recent years it has become part
of the jargon of economics and financial markets, taking its name from a combination of systemic agents in biology and
systematic risks elsewhere.

It is difficult to obtain financial protection against systemic risks, because of the inability of any counter-party to accept
the risk. So it is difficult to obtain insurance for life or property in the event of nuclear war. Similarly, while the loan or
investment risks associated with bankruptcy of a single firm can be reduced by diversification, it is difficult to protect
against a general economic collapse.

One concern is the potential fragility of some financial markets. If the participants are trading at levels far above their
capital bases, then the failure of one participant to settle trades may deprive others of liquidity, and through a domino
effect expose the whole market to systemic risk.

Diversification
Systematic risk is a risk of security that cannot be reduced through diversification. Also sometimes called market risk.

See also
Modern portfolio theory
Capital asset pricing model

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Categories: Financial markets | Risk

This page was last modified 12:29, 11 August 2005.

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