What is systematic risk? - Letsdiskuss
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Posted 22 Mar, 2019 |

What is systematic risk?

Jagriti Malik

@Jagriti | Posted 24 Mar, 2019

Risk that is inherit to the entire market is called systematic risk.
It is also known as market risk or un-divisible risk. 

The most basic strategy for minimizing systematic risk is diversification . A well-diversified portfolio will consist of different types of securities from different industries with varying degrees of risk. The unsystematic risks will offset one another but some systematic risk will always remain.

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Fairy Kumar

@Blogger | Posted 22 Mar, 2019

Systematic risk in financial terms concerns the potential for the failure of institution chain reaction or Domino effect on other institutions consequently threaten the stability of financial markets and even the global economy.

Systematic risk triggered by losses an institution. However, simply the perception of increased risk may lead to panic about the soundness of an institution a general "flight to quality" away from risky assets and toward assets perceived to be less risky. This may cause serious market disruptions propogate across otherwise healthy segments of the market. In turn, these disruptions may trigger panicked "margin call" requests, obliging counterparties to put up more cash or Collateral to compensate for falling prices. As a consequence, borrowers may have to sell of their assets at fire sale prices, pushing prices further down and creating further gowns of margin calls and forced sales.

One proposal for addressing this kind of systemic risk is to make the forms that the systemic exposure pay a fair price for having created it and for imposing costs on other market participants. However, this would mean measuring pricing and then taxing the creation of systemic risk - potentially complex undertaking.

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