It will involve a critique of the subject and an examination of important elements and aspects of systematic risks and how it occurs in the finance sector. The analysis will focus on the sub-prime mortgage financial crises of 2007 – 2009 as a yardstick in describing systematic risk. In attaining the aim of the essay, the following objectives will be examined:
“Systematic financial risk refers to an event (shock ) which triggers a loss of economic value or confidence in, and attendant increases in uncertainty about a substantial portion of the financial system that is large enough to, in all probability have an adverse effect on the real economy” (De Nicolo and Kwast, 2002: 4). Another definition put forward by Billio et al states that “any set of circumstances that threatens the stability of or public confidence in the financial system” (2010)
This definition of systematic risk is a macroeconomic view of the phenomenon. It effectively means that systematic risk is any macroeconomic or pervasive financial risk that has a significant effect on the wider economy. Thus, the definition encompasses any event or major situation that has an adverse effect on the financial system of a given economy. Examples of such systematic risks are the increases in inflation or an unexpected change in the prices of crude oil. Another example is the subprime mortgage financial crises that hit the United States between 2007 and 2009. These changes will inevitably affect the financial sector of a given country and it can lead to issues that can cause the returns on investments on all assets in the economy to be affected adversely.
Another facade of examining systematic risk is to view it from the position of assets in a given corporate entity. Smart and Megginson identify that “systematic risks simultaneously affect many different assets, whereas unsystematic risks affect just a few securities [or