Investigating Systematic and Idiosyncratic Risks in Money, Banking and Financial Markets

Investigating Systematic and Idiosyncratic Risks in Money, Banking and Financial Markets

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Risks, the Effects and Affected
At some point in our lives, we have all experience some form of risk either a systematic or idiosyncratic risks. According to authors, Stephen G. Cecchetti and Kermit L. Schoenholt’z book, Money, Banking, Financial Markets, “Risk is everywhere. It comes in many forms and from almost everywhere imaginable place. All risks can be classified into one of two groups: (1) those affecting a small number of people but no one else (unique or idiosyncratic risks) and (2) those affecting everyone (systematic or economy wide risks) (ch.5 p.110).” The main point of this paper is to investigate systematic and idiosyncratic risks, what causes each to occur and how they can be eliminated if possible.
What are Risks?
A systematic risk or economy wide risks is believe to be the worst of the types of risks because it cannot be avoided and it can also be very detrimental to governments, firms and households making it much harder to recover from the losses. There are also “macroeconomic factors, such as swings in consumer and business confidence brought on by global economics conditions or changes in the political climate. For History tells us that when oil prices rise, auto sales fall, and the automobile industry suffers (ch.5 p.111).” Another famous example of an economy wide risks is the Housing Bubble Crisis. In 2008, the economy experience a recession that left behind in its wake thousands of people having their homes foreclosed and homeless. Many people also lost their jobs and lifesavings due to businesses losing profits sending the unemployment rate to 10 percent. Some companies could not sustain the downturn of the economy like the Lehman Brothers. Forbes’s magazine author Steve Schaefer’s article, The Great...

... middle of paper ...

...easure risks is lesson we all can learn from and use in

our daily financial transactions. Although, you make not be able to avoid a systematic or

economy wide risks because it happens to all firms, government and households we can reduce

personal risk or idiosyncratic risks by spreading the risks simply just not keeping “all of eggs in

one basket (ch.5 p.112).” I think the government of the U.S. should take precautions to ensure

that systematic risks are not deadly to society.

Schaefer, Steve (2011). The Great Recession's Biggest Bankrupties:Where Are They Now?
Cecchetti, S. G.and Schoenholtz, K. L. (2014). Money,Banking, And Financial Markets. New York McGraw-Hill/Irwin.
Katz, Ian and Tracer, Zachary and Buhayar, Noah. (2014). Berkshire Is Said to Face Start of U.S. Systemic-Risk Scrutiny.

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