Undiversifiable risk

Undiversifiable risk

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 ?
109) To induce a reduction in risk taking, returns to undiversifiable risk, as well as supernormal returns, could be taxed by imputing and exempting interest on equity at a riskless rate.
Somewhat more precisely, the price would be set at the present discounted value of the future increase in expected earnings, where the expected earnings are adjusted by the undiversifiable risk associated with a law degree.
Moreover, more participation from foreign insurers, as occurred after Australia liberalized its mortgage insurance marketplace, would help diversify financial market risks well beyond Canadian borders, and the scope of domestic undiversifiable risk exposure would in fact shrink.
We identify three conditions that explain this result: (1) insurance contracts are priced competitively, (2) financial prices include a risk premium only for undiversifiable risk, and (3) financial markets are effectively complete.
3) That part of the risk of a stock that can be eliminated is called diversifiable risk, while that part that cannot be eliminated is termed market risk, or undiversifiable risk.
However, because of the "stickiness" of regulated insurer capital, catastrophe risk should be considered as an undiversifiable risk, both within individual insurers and across the insurance and reinsurance markets.
0044%, the undiversifiable risk for the internationally diversified portfolio is much lower than that for either the domestic portfolio or the ADRs portfolio.
Typically, managers do not tender their personal shares in TOSRs, which increases their personal undiversifiable risk (Ofer and Thakor, 1987).
The greater the undiversifiable risk becomes, the more domestic savers reduce their holdings of X assets, and the greater is the share of investment in X done by foreign savers.
j], is the risk charge investors demand for bearing undiversifiable risk.
These characteristics are then used to empirically test whether a firm's cost of risk bearing is negatively related to the amount of undiversifiable risk it is willing to assume in its underwriting portfolio, as measured by its exposure due to a catastrophic earthquake.
More recently, Doherty (1991) considers participating policies as a contractual innovation that facilitates efficient sharing of undiversifiable risk associated with unstable liability rules.