Systemic Risk

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Systemic Risk

Risk common to a particular sector or country. Often refers to a risk resulting from a particular "system" that is in place, such as the regulator framework for monitoring of financial_institutions.

Systemic Risk

A risk that is carried by an entire class of assets and/or liabilities. Systemic risk may apply to a certain country or industry, or to the entire global economy. It is impossible to reduce systemic risk for the global economy (complete global shutdown is always theoretically possible), but one may mitigate other forms of systemic risk by buying different kinds of securities and/or by buying in different industries. For example, oil companies have the systemic risk that they will drill up all the oil in the world; an investor may mitigate this risk by investing in both oil companies and companies having nothing to do with oil. Systemic risk is also called systematic risk or undiversifiable risk.
References in periodicals archive ?
Nondiversifiable risks are those which materialize simultaneously either in a coordinated way or with a high level of correlation.
TABLE 5 Classification of Nondiversifiable Risks in Pension Systems Types of Risk Risk Origin Factors Financial From capital risk From reinvestment From inflation Economic From the growth of unemployment risk From the reduction in the growth rate of the GDP From the reduction in the growth rate of real salaries Demographic From the increase in longevity of the population risk From the decrease in the rate of fertility From the growth of the net emigration rate From the reduction in the rate of activity Political risk From the reduction Implicit Inflation in the promised Explicit * Retirement age pension ** Replacement rate * Requirements Source: Authors based on Valdes-Prieto (1998 and 2002).
The factor selection approach used is to specify macroeconomic and financial market variables that are thought to capture the nondiversifiable risks of the economy.
iM] represents asset i's exposure to nondiversifiable risk M, [R.
From a conditional point of view, it seems that the time-varying price of market risk ([gamma]) explains expected excess returns better than time-varying nondiversifiable risk as measured by the CAPM beta ([beta]).
Similar arguments can be raised from the mere existence of insurance, as it deals with the treatment of nondiversifiable risks.