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class="vector-toc-numb">2</span> <span>Measurement</span> </div> </a> <button aria-controls="toc-Measurement-sublist" class="cdx-button cdx-button--weight-quiet cdx-button--icon-only vector-toc-toggle"> <span class="vector-icon mw-ui-icon-wikimedia-expand"></span> <span>Toggle Measurement subsection</span> </button> <ul id="toc-Measurement-sublist" class="vector-toc-list"> <li id="toc-TBTF/TCTF" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#TBTF/TCTF"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.1</span> <span>TBTF/TCTF</span> </div> </a> <ul id="toc-TBTF/TCTF-sublist" class="vector-toc-list"> <li id="toc-Too_big_to_fail" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#Too_big_to_fail"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.1.1</span> <span>Too big to fail</span> </div> </a> <ul id="toc-Too_big_to_fail-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Too_connected_to_fail" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#Too_connected_to_fail"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.1.2</span> <span>Too connected to fail</span> </div> </a> <ul id="toc-Too_connected_to_fail-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Criticisms_of_systemic_risk_measurements" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#Criticisms_of_systemic_risk_measurements"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.1.3</span> <span>Criticisms of systemic risk measurements</span> </div> </a> <ul id="toc-Criticisms_of_systemic_risk_measurements-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-SRISK" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#SRISK"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.2</span> <span>SRISK</span> </div> </a> <ul id="toc-SRISK-sublist" class="vector-toc-list"> <li id="toc-Pair/vine_copulas" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#Pair/vine_copulas"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.2.1</span> <span>Pair/vine copulas</span> </div> </a> <ul id="toc-Pair/vine_copulas-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> </ul> </li> <li id="toc-Valuation_of_assets_and_derivatives_under_systemic_risk" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Valuation_of_assets_and_derivatives_under_systemic_risk"> <div class="vector-toc-text"> <span class="vector-toc-numb">3</span> <span>Valuation of assets and derivatives under systemic risk</span> </div> </a> <button aria-controls="toc-Valuation_of_assets_and_derivatives_under_systemic_risk-sublist" class="cdx-button cdx-button--weight-quiet cdx-button--icon-only vector-toc-toggle"> <span class="vector-icon mw-ui-icon-wikimedia-expand"></span> <span>Toggle Valuation of assets and derivatives under systemic risk subsection</span> </button> <ul id="toc-Valuation_of_assets_and_derivatives_under_systemic_risk-sublist" class="vector-toc-list"> <li id="toc-Inadequacy_of_classic_valuation_models" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Inadequacy_of_classic_valuation_models"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.1</span> <span>Inadequacy of classic valuation models</span> </div> </a> <ul id="toc-Inadequacy_of_classic_valuation_models-sublist" class="vector-toc-list"> <li id="toc-The_Merton_(1974)_model" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#The_Merton_(1974)_model"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.1.1</span> <span>The Merton (1974) model</span> </div> </a> <ul id="toc-The_Merton_(1974)_model-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Non-trivial_asset_value_equations" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#Non-trivial_asset_value_equations"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.1.2</span> <span>Non-trivial asset value equations</span> </div> </a> <ul id="toc-Non-trivial_asset_value_equations-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Over-_and_underestimation_of_default_probabilities" class="vector-toc-list-item vector-toc-level-3"> <a class="vector-toc-link" href="#Over-_and_underestimation_of_default_probabilities"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.1.3</span> <span>Over- and underestimation of default probabilities</span> </div> </a> <ul id="toc-Over-_and_underestimation_of_default_probabilities-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-Structural_models_under_financial_interconnectedness" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Structural_models_under_financial_interconnectedness"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.2</span> <span>Structural models under financial interconnectedness</span> </div> </a> <ul id="toc-Structural_models_under_financial_interconnectedness-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Risk-neutral_valuation:_price_indeterminacy_and_open_problems" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Risk-neutral_valuation:_price_indeterminacy_and_open_problems"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.3</span> <span>Risk-neutral valuation: price indeterminacy and open problems</span> </div> </a> <ul id="toc-Risk-neutral_valuation:_price_indeterminacy_and_open_problems-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-Factors" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Factors"> <div class="vector-toc-text"> <span class="vector-toc-numb">4</span> <span>Factors</span> </div> </a> <ul id="toc-Factors-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Diversification" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Diversification"> <div class="vector-toc-text"> <span class="vector-toc-numb">5</span> <span>Diversification</span> </div> </a> <ul id="toc-Diversification-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Regulation" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Regulation"> <div class="vector-toc-text"> <span class="vector-toc-numb">6</span> <span>Regulation</span> </div> </a> <ul id="toc-Regulation-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Project_risks" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Project_risks"> <div class="vector-toc-text"> <span class="vector-toc-numb">7</span> <span>Project risks</span> </div> </a> <ul id="toc-Project_risks-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Systemic_risk_and_insurance" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Systemic_risk_and_insurance"> <div class="vector-toc-text"> <span class="vector-toc-numb">8</span> <span>Systemic risk and insurance</span> </div> </a> <ul id="toc-Systemic_risk_and_insurance-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Discussion" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Discussion"> <div class="vector-toc-text"> <span class="vector-toc-numb">9</span> <span>Discussion</span> </div> </a> <ul id="toc-Discussion-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-See_also" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#See_also"> <div class="vector-toc-text"> <span class="vector-toc-numb">10</span> <span>See also</span> </div> </a> <ul id="toc-See_also-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Further_reading" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Further_reading"> <div class="vector-toc-text"> <span class="vector-toc-numb">11</span> <span>Further reading</span> </div> </a> <ul id="toc-Further_reading-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-References" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#References"> <div class="vector-toc-text"> <span class="vector-toc-numb">12</span> <span>References</span> </div> </a> <ul id="toc-References-sublist" class="vector-toc-list"> </ul> </li> </ul> </div> </div> </nav> </div> </div> <div class="mw-content-container"> <main id="content" class="mw-body"> 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</div> </div> </div> </nav> <h1 id="firstHeading" class="firstHeading mw-first-heading"><span class="mw-page-title-main">Systemic risk</span></h1> <div id="p-lang-btn" class="vector-dropdown mw-portlet mw-portlet-lang" > <input type="checkbox" id="p-lang-btn-checkbox" role="button" aria-haspopup="true" data-event-name="ui.dropdown-p-lang-btn" class="vector-dropdown-checkbox mw-interlanguage-selector" aria-label="Go to an article in another language. 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href="https://az.wikipedia.org/wiki/Sistemli_risk" title="Sistemli risk – Azerbaijani" lang="az" hreflang="az" data-title="Sistemli risk" data-language-autonym="Azərbaycanca" data-language-local-name="Azerbaijani" class="interlanguage-link-target"><span>Azərbaycanca</span></a></li><li class="interlanguage-link interwiki-de mw-list-item"><a href="https://de.wikipedia.org/wiki/Systemrisiko" title="Systemrisiko – German" lang="de" hreflang="de" data-title="Systemrisiko" data-language-autonym="Deutsch" data-language-local-name="German" class="interlanguage-link-target"><span>Deutsch</span></a></li><li class="interlanguage-link interwiki-es mw-list-item"><a href="https://es.wikipedia.org/wiki/Riesgo_sist%C3%A9mico" title="Riesgo sistémico – Spanish" lang="es" hreflang="es" data-title="Riesgo sistémico" data-language-autonym="Español" data-language-local-name="Spanish" class="interlanguage-link-target"><span>Español</span></a></li><li class="interlanguage-link interwiki-fa mw-list-item"><a href="https://fa.wikipedia.org/wiki/%D8%B1%DB%8C%D8%B3%DA%A9_%D8%B3%DB%8C%D8%B3%D8%AA%D9%85%DB%8C" title="ریسک سیستمی – Persian" lang="fa" hreflang="fa" data-title="ریسک سیستمی" data-language-autonym="فارسی" data-language-local-name="Persian" class="interlanguage-link-target"><span>فارسی</span></a></li><li class="interlanguage-link interwiki-fr mw-list-item"><a href="https://fr.wikipedia.org/wiki/Risque_financier_syst%C3%A9mique" title="Risque financier systémique – French" lang="fr" hreflang="fr" data-title="Risque financier systémique" data-language-autonym="Français" data-language-local-name="French" class="interlanguage-link-target"><span>Français</span></a></li><li class="interlanguage-link interwiki-ko mw-list-item"><a href="https://ko.wikipedia.org/wiki/%EC%B2%B4%EA%B3%84%EC%A0%81_%EC%9C%84%ED%97%98" title="체계적 위험 – Korean" lang="ko" hreflang="ko" data-title="체계적 위험" data-language-autonym="한국어" data-language-local-name="Korean" class="interlanguage-link-target"><span>한국어</span></a></li><li class="interlanguage-link interwiki-it mw-list-item"><a href="https://it.wikipedia.org/wiki/Rischio_sistemico" title="Rischio sistemico – Italian" lang="it" hreflang="it" data-title="Rischio sistemico" data-language-autonym="Italiano" data-language-local-name="Italian" class="interlanguage-link-target"><span>Italiano</span></a></li><li class="interlanguage-link interwiki-mk mw-list-item"><a href="https://mk.wikipedia.org/wiki/%D0%A1%D0%B8%D1%81%D1%82%D0%B5%D0%BC%D1%81%D0%BA%D0%B8_%D1%80%D0%B8%D0%B7%D0%B8%D0%BA" title="Системски ризик – Macedonian" lang="mk" hreflang="mk" data-title="Системски ризик" data-language-autonym="Македонски" data-language-local-name="Macedonian" class="interlanguage-link-target"><span>Македонски</span></a></li><li class="interlanguage-link interwiki-ms mw-list-item"><a href="https://ms.wikipedia.org/wiki/Risiko_sistemik" title="Risiko sistemik – Malay" lang="ms" hreflang="ms" data-title="Risiko 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href="https://ru.wikipedia.org/wiki/%D0%A1%D0%B8%D1%81%D1%82%D0%B5%D0%BC%D0%BD%D1%8B%D0%B9_%D1%80%D0%B8%D1%81%D0%BA" title="Системный риск – Russian" lang="ru" hreflang="ru" data-title="Системный риск" data-language-autonym="Русский" data-language-local-name="Russian" class="interlanguage-link-target"><span>Русский</span></a></li><li class="interlanguage-link interwiki-sr mw-list-item"><a href="https://sr.wikipedia.org/wiki/%D0%A1%D0%B8%D1%81%D1%82%D0%B5%D0%BC%D1%81%D0%BA%D0%B8_%D1%80%D0%B8%D0%B7%D0%B8%D0%BA" title="Системски ризик – Serbian" lang="sr" hreflang="sr" data-title="Системски ризик" data-language-autonym="Српски / srpski" data-language-local-name="Serbian" class="interlanguage-link-target"><span>Српски / srpski</span></a></li><li class="interlanguage-link interwiki-zh mw-list-item"><a href="https://zh.wikipedia.org/wiki/%E7%B3%BB%E7%BB%9F%E9%A3%8E%E9%99%A9" title="系统风险 – Chinese" lang="zh" hreflang="zh" data-title="系统风险" data-language-autonym="中文" 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id="siteSub" class="noprint">From Wikipedia, the free encyclopedia</div> </div> <div id="contentSub"><div id="mw-content-subtitle"></div></div> <div id="mw-content-text" class="mw-body-content"><div class="mw-content-ltr mw-parser-output" lang="en" dir="ltr"><div class="shortdescription nomobile noexcerpt noprint searchaux" style="display:none">Risk of collapse of an entire financial system or entire market</div> <style data-mw-deduplicate="TemplateStyles:r1236090951">.mw-parser-output .hatnote{font-style:italic}.mw-parser-output div.hatnote{padding-left:1.6em;margin-bottom:0.5em}.mw-parser-output .hatnote i{font-style:normal}.mw-parser-output .hatnote+link+.hatnote{margin-top:-0.5em}@media print{body.ns-0 .mw-parser-output .hatnote{display:none!important}}</style><div role="note" class="hatnote navigation-not-searchable">Not to be confused with <a href="/wiki/Systematic_risk" title="Systematic risk">systematic risk</a>.</div> <style 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a{color:var(--color-progressive)!important}}@media print{body.ns-0 .mw-parser-output .sidebar{display:none!important}}</style><table class="sidebar nomobile nowraplinks" style="border:1px solid #B2BEB5"><tbody><tr><td class="sidebar-pretitle" style="background:#ACE1AF">Categories of</td></tr><tr><th class="sidebar-title-with-pretitle" style="background:#ACE1AF;font-size:200%;font-weight:normal;padding-bottom:0.15em;"><a href="/wiki/Financial_risk" title="Financial risk">Financial risk</a></th></tr><tr><td class="sidebar-image"><span typeof="mw:File"><a href="/wiki/File:Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg" class="mw-file-description"><img src="//upload.wikimedia.org/wikipedia/commons/thumb/6/61/Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg/100px-Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg" decoding="async" width="100" height="49" class="mw-file-element" srcset="//upload.wikimedia.org/wikipedia/commons/thumb/6/61/Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg/150px-Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg 1.5x, //upload.wikimedia.org/wikipedia/commons/thumb/6/61/Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg/200px-Solidus-Constantius_Gallus-thessalonica_RIC_149.jpg 2x" data-file-width="500" data-file-height="244" /></a></span></td></tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Credit_risk" title="Credit risk">Credit risk</a></th></tr><tr><td class="sidebar-content plainlist"> <ul><li><a href="/wiki/Settlement_risk" title="Settlement risk">Settlement risk</a></li> <li><a href="/wiki/Concentration_risk" title="Concentration risk">Concentration risk</a></li> <li><a href="/wiki/Sovereign_credit_risk" title="Sovereign credit risk">Sovereign risk</a></li> <li><a href="/wiki/Default_(finance)" title="Default (finance)">Default risk</a></li></ul></td> </tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Market_risk" title="Market risk">Market risk</a></th></tr><tr><td class="sidebar-content plainlist"> <ul><li><a href="/wiki/Interest_rate_risk" title="Interest rate risk">Interest rate risk</a></li> <li><a href="/wiki/Inflation_risk" class="mw-redirect" title="Inflation risk">Inflation risk</a></li> <li><a href="/wiki/Currency_risk" class="mw-redirect" title="Currency risk">Currency risk</a></li> <li><a href="/wiki/Equity_risk" title="Equity risk">Equity risk</a></li> <li><a href="/wiki/Commodity_risk" title="Commodity risk">Commodity risk</a></li> <li><a href="/wiki/Volatility_risk" title="Volatility risk">Volatility risk</a></li> <li><a class="mw-selflink selflink">Systemic risk</a></li></ul></td> </tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Liquidity_risk" title="Liquidity risk">Liquidity risk</a></th></tr><tr><td class="sidebar-content plainlist"> <ul><li><a href="/wiki/Refinancing_risk" title="Refinancing risk">Refinancing risk</a></li> <li><a href="/wiki/Deposit_risk" title="Deposit risk">Deposit risk</a></li> <li><a href="/wiki/Margining_risk" title="Margining risk">Margining risk</a></li></ul></td> </tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Investment_risk" class="mw-redirect" title="Investment risk">Investment risk</a></th></tr><tr><td class="sidebar-content plainlist"> <ul><li><a href="/wiki/Model_risk" title="Model risk">Model risk</a></li> <li><a href="/wiki/Execution_risk" class="mw-redirect" title="Execution risk">Execution risk</a></li> <li><a href="/wiki/Valuation_risk" title="Valuation risk">Valuation risk</a></li></ul></td> </tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Business_risk" class="mw-redirect" title="Business risk">Business risk</a></th></tr><tr><td class="sidebar-content plainlist"> <ul><li><a href="/wiki/Reputational_risk" class="mw-redirect" title="Reputational risk">Reputational risk</a></li> <li><a href="/wiki/Operational_risk" title="Operational risk">Operational risk</a></li> <li><a href="/wiki/Country_risk" title="Country risk">Country risk</a></li> <li><a href="/wiki/Political_risk" title="Political risk">Political risk</a></li> <li><a href="/wiki/Legal_risk" title="Legal risk">Legal risk</a></li> <li><a href="/wiki/Moral_hazard" title="Moral hazard">Moral hazard</a></li></ul></td> </tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Profit_risk" title="Profit risk">Profit risk</a></th></tr><tr><th class="sidebar-heading" style="background:#ACE1AF"> <a href="/wiki/Non-financial_risk" title="Non-financial risk">Non-financial risk</a></th></tr><tr><td class="sidebar-content plainlist"> <ul><li><a href="/wiki/Stranded_asset" title="Stranded asset">Stranded asset</a></li></ul></td> </tr><tr><td class="sidebar-navbar"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1129693374"><style data-mw-deduplicate="TemplateStyles:r1239400231">.mw-parser-output .navbar{display:inline;font-size:88%;font-weight:normal}.mw-parser-output .navbar-collapse{float:left;text-align:left}.mw-parser-output .navbar-boxtext{word-spacing:0}.mw-parser-output .navbar ul{display:inline-block;white-space:nowrap;line-height:inherit}.mw-parser-output .navbar-brackets::before{margin-right:-0.125em;content:"[ "}.mw-parser-output .navbar-brackets::after{margin-left:-0.125em;content:" ]"}.mw-parser-output .navbar li{word-spacing:-0.125em}.mw-parser-output .navbar a>span,.mw-parser-output .navbar a>abbr{text-decoration:inherit}.mw-parser-output .navbar-mini abbr{font-variant:small-caps;border-bottom:none;text-decoration:none;cursor:inherit}.mw-parser-output .navbar-ct-full{font-size:114%;margin:0 7em}.mw-parser-output .navbar-ct-mini{font-size:114%;margin:0 4em}html.skin-theme-clientpref-night .mw-parser-output .navbar li a abbr{color:var(--color-base)!important}@media(prefers-color-scheme:dark){html.skin-theme-clientpref-os .mw-parser-output .navbar li a abbr{color:var(--color-base)!important}}@media print{.mw-parser-output .navbar{display:none!important}}</style><div class="navbar plainlinks hlist navbar-mini"><ul><li class="nv-view"><a href="/wiki/Template:Financial_risk_types" title="Template:Financial risk types"><abbr title="View this template">v</abbr></a></li><li class="nv-talk"><a href="/wiki/Template_talk:Financial_risk_types" title="Template talk:Financial risk types"><abbr title="Discuss this template">t</abbr></a></li><li class="nv-edit"><a href="/wiki/Special:EditPage/Template:Financial_risk_types" title="Special:EditPage/Template:Financial risk types"><abbr title="Edit this template">e</abbr></a></li></ul></div></td></tr></tbody></table> <p>In <a href="/wiki/Finance" title="Finance">finance</a>, <b>systemic risk</b> is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system.<sup id="cite_ref-Kaufman_1-0" class="reference"><a href="#cite_note-Kaufman-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-2" class="reference"><a href="#cite_note-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-Ilin_3-0" class="reference"><a href="#cite_note-Ilin-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> It can be defined as "financial <i>system</i> instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries".<sup id="cite_ref-4" class="reference"><a href="#cite_note-4"><span class="cite-bracket">[</span>4<span class="cite-bracket">]</span></a></sup> It refers to the risks imposed by <i>interlinkages</i> and <i>interdependencies</i> in a system or market, where the failure of a single entity or cluster of entities can cause a <a href="/wiki/Cascading_failure" title="Cascading failure">cascading failure</a>, which could potentially bankrupt or bring down the entire system or market.<sup id="cite_ref-5" class="reference"><a href="#cite_note-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup> It is also sometimes erroneously referred to as "<a href="/wiki/Systematic_risk" title="Systematic risk">systematic risk</a>". </p> <meta property="mw:PageProp/toc" /> <div class="mw-heading mw-heading2"><h2 id="Explanation">Explanation</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=1" title="Edit section: Explanation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Systemic risk has been associated with a <a href="/wiki/Bank_run" title="Bank run">bank run</a> which has a cascading effect on other banks which are owed money by the first bank in trouble, causing a <a href="/wiki/Cascading_failure" title="Cascading failure">cascading failure</a>. As depositors sense the ripple effects of default, and <a href="/wiki/Liquidity" title="Liquidity">liquidity</a> concerns cascade through money markets, a panic can spread through a market, with a sudden <a href="/wiki/Flight_to_quality" class="mw-redirect" title="Flight to quality">flight to quality</a>, creating many sellers but few buyers for illiquid assets. These interlinkages and the potential "clustering" of <a href="/wiki/Bank_run" title="Bank run">bank runs</a> are the issues which policy makers consider when addressing the issue of protecting a system against systemic risk.<sup id="cite_ref-Kaufman_1-1" class="reference"><a href="#cite_note-Kaufman-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-CRMPG3_6-0" class="reference"><a href="#cite_note-CRMPG3-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup> Governments and market monitoring institutions (such as the <a href="/wiki/U.S._Securities_and_Exchange_Commission" title="U.S. Securities and Exchange Commission">U.S. Securities and Exchange Commission</a> (SEC), and <a href="/wiki/Central_banks" class="mw-redirect" title="Central banks">central banks</a>) often try to put policies and rules in place with the justification of safeguarding the interests of the market as a whole, claiming that the trading participants in financial markets are entangled in a web of dependencies arising from their interlinkage. In simple English, this means that some companies are viewed as too big and too interconnected to fail. Policy makers frequently claim that they are concerned about protecting the resiliency of the system, rather than any one individual in that system.<sup id="cite_ref-CRMPG3_6-1" class="reference"><a href="#cite_note-CRMPG3-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup> Systemic risk arises because of the interaction of market participants, and therefore can be seen as a form of <a href="/wiki/Endogenous_risk" title="Endogenous risk">endogenous risk</a>.<sup id="cite_ref-7" class="reference"><a href="#cite_note-7"><span class="cite-bracket">[</span>7<span class="cite-bracket">]</span></a></sup> </p><p>The risk management literature offers an alternative perspective to notions from economics and finance by distinguishing between the nature of systemic failure, its causes and effects, and the risk of its occurrence.<sup id="cite_ref-Ilin_3-1" class="reference"><a href="#cite_note-Ilin-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> It takes an "operational behaviour" approach to defining systemic risk of failure as: "A measure of the overall probability at a current time of the system entering an operational state of systemic failure by a specified time in the future, in which the supply of financial services no longer satisfies demand according to regulatory criteria, qualified by a measure of uncertainty about the system's future behaviour, in the absence of new mitigation efforts." This definition lends itself to practical risk mitigation applications, as demonstrated in recent research by a simulation of the collapse of the Icelandic financial system in circa 2008. </p><p>Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade. </p><p>Insurance is often easy to obtain against "systemic risks" because a party issuing that insurance can pocket the premiums, issue dividends to shareholders, enter insolvency proceedings if a catastrophic event ever takes place, and hide behind limited liability. Such insurance, however, is not effective for the insured entity. </p><p>One argument that was used by financial institutions to obtain special advantages in bankruptcy for derivative contracts was a claim that the market is both critical and fragile.<sup id="cite_ref-Kaufman_1-2" class="reference"><a href="#cite_note-Kaufman-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-CRMPG3_6-2" class="reference"><a href="#cite_note-CRMPG3-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-8" class="reference"><a href="#cite_note-8"><span class="cite-bracket">[</span>8<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-9" class="reference"><a href="#cite_note-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup> </p><p>Systemic risk can also be defined as the likelihood and degree of negative consequences to the larger body. With respect to federal <a href="/wiki/Financial_regulation" title="Financial regulation">financial regulation</a>, the systemic risk of a financial institution is the likelihood and the degree that the institution's activities will negatively affect the larger economy such that unusual and extreme federal intervention would be required to ameliorate the effects.<sup id="cite_ref-10" class="reference"><a href="#cite_note-10"><span class="cite-bracket">[</span>10<span class="cite-bracket">]</span></a></sup> </p><p>A general definition of systemic risk which is not limited by its mathematical approaches, model assumptions or focus on one institution, and which is also the first operationalizable definition of systemic risk encompassing the systemic character of financial, political, environmental, and many other risks, was put forth in 2010.<sup id="cite_ref-11" class="reference"><a href="#cite_note-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> </p><p>The <a href="/wiki/Systemic_Risk_Centre" title="Systemic Risk Centre">Systemic Risk Centre</a> at the <a href="/wiki/London_School_of_Economics" title="London School of Economics">London School of Economics</a> is focused on the study of systemic risk. It finds that systemic risk is a form of <a href="/wiki/Endogenous_risk" title="Endogenous risk">endogenous risk</a>, hence frustrating empirical measurements of systemic risk. </p> <div class="mw-heading mw-heading2"><h2 id="Measurement">Measurement</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=2" title="Edit section: Measurement"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <div class="mw-heading mw-heading3"><h3 id="TBTF/TCTF"><span id="TBTF.2FTCTF"></span>TBTF/TCTF</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=3" title="Edit section: TBTF/TCTF"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>According to the Property Casualty Insurers Association of America, there are two key assessments for measuring systemic risk, the "<a href="/wiki/Too_big_to_fail" title="Too big to fail">too big to fail</a>" (TBTF) and the "too (inter)connected to fail" (TCTF or TICTF) tests. First, the TBTF test is the traditional analysis for assessing the risk of required government intervention. TBTF can be measured in terms of an institution's size relative to the national and international marketplace, market share concentration, and competitive barriers to entry or how easily a product can be substituted. Second, the TCTF test is a measure of the likelihood and amount of medium-term net negative impact to the larger economy of an institution's failure to be able to conduct its ongoing business. The impact is measure beyond the institution's products and activities to include the economic multiplier of all other commercial activities dependent specifically on that institution. The impact is also dependent on how correlated an institution's business is with other systemic risks.<sup id="cite_ref-12" class="reference"><a href="#cite_note-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading4"><h4 id="Too_big_to_fail">Too big to fail</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=4" title="Edit section: Too big to fail"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1236090951"><div role="note" class="hatnote navigation-not-searchable">Main article: <a href="/wiki/Too_big_to_fail" title="Too big to fail">Too big to fail</a></div> <style data-mw-deduplicate="TemplateStyles:r1251242444">.mw-parser-output .ambox{border:1px solid #a2a9b1;border-left:10px solid #36c;background-color:#fbfbfb;box-sizing:border-box}.mw-parser-output .ambox+link+.ambox,.mw-parser-output .ambox+link+style+.ambox,.mw-parser-output .ambox+link+link+.ambox,.mw-parser-output .ambox+.mw-empty-elt+link+.ambox,.mw-parser-output .ambox+.mw-empty-elt+link+style+.ambox,.mw-parser-output .ambox+.mw-empty-elt+link+link+.ambox{margin-top:-1px}html body.mediawiki .mw-parser-output .ambox.mbox-small-left{margin:4px 1em 4px 0;overflow:hidden;width:238px;border-collapse:collapse;font-size:88%;line-height:1.25em}.mw-parser-output .ambox-speedy{border-left:10px solid #b32424;background-color:#fee7e6}.mw-parser-output .ambox-delete{border-left:10px solid #b32424}.mw-parser-output .ambox-content{border-left:10px solid #f28500}.mw-parser-output .ambox-style{border-left:10px solid #fc3}.mw-parser-output .ambox-move{border-left:10px solid #9932cc}.mw-parser-output .ambox-protection{border-left:10px solid #a2a9b1}.mw-parser-output .ambox .mbox-text{border:none;padding:0.25em 0.5em;width:100%}.mw-parser-output .ambox .mbox-image{border:none;padding:2px 0 2px 0.5em;text-align:center}.mw-parser-output .ambox .mbox-imageright{border:none;padding:2px 0.5em 2px 0;text-align:center}.mw-parser-output .ambox .mbox-empty-cell{border:none;padding:0;width:1px}.mw-parser-output .ambox .mbox-image-div{width:52px}@media(min-width:720px){.mw-parser-output .ambox{margin:0 10%}}@media print{body.ns-0 .mw-parser-output .ambox{display:none!important}}</style><table class="box-Unreferenced_section plainlinks metadata ambox ambox-content ambox-Unreferenced" role="presentation"><tbody><tr><td class="mbox-image"><div class="mbox-image-div"><span typeof="mw:File"><a href="/wiki/File:Question_book-new.svg" class="mw-file-description"><img alt="" src="//upload.wikimedia.org/wikipedia/en/thumb/9/99/Question_book-new.svg/50px-Question_book-new.svg.png" decoding="async" width="50" height="39" class="mw-file-element" srcset="//upload.wikimedia.org/wikipedia/en/thumb/9/99/Question_book-new.svg/75px-Question_book-new.svg.png 1.5x, //upload.wikimedia.org/wikipedia/en/thumb/9/99/Question_book-new.svg/100px-Question_book-new.svg.png 2x" data-file-width="512" data-file-height="399" /></a></span></div></td><td class="mbox-text"><div class="mbox-text-span">This section <b>does not <a href="/wiki/Wikipedia:Citing_sources" title="Wikipedia:Citing sources">cite</a> any <a href="/wiki/Wikipedia:Verifiability" title="Wikipedia:Verifiability">sources</a></b>.<span class="hide-when-compact"> Please help <a href="/wiki/Special:EditPage/Systemic_risk" title="Special:EditPage/Systemic risk">improve this section</a> by <a href="/wiki/Help:Referencing_for_beginners" title="Help:Referencing for beginners">adding citations to reliable sources</a>. Unsourced material may be challenged and <a href="/wiki/Wikipedia:Verifiability#Burden_of_evidence" title="Wikipedia:Verifiability">removed</a>.</span> <span class="date-container"><i>(<span class="date">June 2023</span>)</i></span><span class="hide-when-compact"><i> (<small><a href="/wiki/Help:Maintenance_template_removal" title="Help:Maintenance template removal">Learn how and when to remove this message</a></small>)</i></span></div></td></tr></tbody></table> <p>The traditional analysis for assessing the risk of required government intervention is the "too big to fail" test (TBTF). TBTF can be measured in terms of an institution's size relative to the national and international marketplace, market share concentration (using the <a href="/wiki/Herfindahl_index" class="mw-redirect" title="Herfindahl index">Herfindahl-Hirschman Index</a> for example), and competitive barriers to entry or how easily a product can be substituted. While there are large companies in most financial marketplace segments, the national insurance marketplace is spread among thousands of companies, and the barriers to entry in a business where capital is the primary input are relatively minor. The policies of one homeowners insurer can be relatively easily substituted for another or picked up by a state residual market provider, with limits on the underwriting fluidity primarily stemming from state-by-state regulatory impediments, such as limits on pricing and capital mobility. During the recent financial crisis, the collapse of the American International Group (AIG) posed a significant systemic risk to the financial system. There are arguably either no or extremely few insurers that are TBTF in the U.S. marketplace. </p> <div class="mw-heading mw-heading4"><h4 id="Too_connected_to_fail">Too connected to fail</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=5" title="Edit section: Too connected to fail"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1236090951"><div role="note" class="hatnote navigation-not-searchable">Main article: <a href="/wiki/Too_connected_to_fail" title="Too connected to fail">Too connected to fail</a></div> <p>A more useful systemic risk measure than a traditional TBTF test is a "too connected to fail" (TCTF) assessment. An intuitive TCTF analysis has been at the heart of most recent federal financial emergency relief decisions. TCTF is a measure of the likelihood and amount of medium-term net negative impact to the larger economy of an institution's failure to be able to conduct its ongoing business. </p><p>Network models have been proposed as a method for quantifying the impact of interconnectedness on systemic risk.<sup id="cite_ref-13" class="reference"><a href="#cite_note-13"><span class="cite-bracket">[</span>13<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-14" class="reference"><a href="#cite_note-14"><span class="cite-bracket">[</span>14<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-15" class="reference"><a href="#cite_note-15"><span class="cite-bracket">[</span>15<span class="cite-bracket">]</span></a></sup> </p><p>The impact is measured not just on the institution's products and activities, but also the economic multiplier of all other commercial activities dependent specifically on that institution. It is also dependent on how correlated an institution's business is with other systemic risk.<sup id="cite_ref-16" class="reference"><a href="#cite_note-16"><span class="cite-bracket">[</span>16<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading4"><h4 id="Criticisms_of_systemic_risk_measurements">Criticisms of systemic risk measurements</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=6" title="Edit section: Criticisms of systemic risk measurements"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p><i>Criticisms of systemic risk measurements:</i> Danielsson et al.<sup id="cite_ref-17" class="reference"><a href="#cite_note-17"><span class="cite-bracket">[</span>17<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-18" class="reference"><a href="#cite_note-18"><span class="cite-bracket">[</span>18<span class="cite-bracket">]</span></a></sup> express concerns about systemic risk measurements, such as SRISK and CoVaR, because they are based on market outcomes that happen multiple times a year, so that the probability of systemic risk as measured does not correspond to the actual systemic risk in the financial system. Systemic financial crises happen once every 43 years for a typical OECD country and measurements of systemic risk should target that probability. </p> <div class="mw-heading mw-heading3"><h3 id="SRISK">SRISK</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=7" title="Edit section: SRISK"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>A financial institution represents a systemic risk if it becomes undercapitalized when the financial system as a whole is undercapitalized. In a single risk factor model, Brownlees and Engle <sup id="cite_ref-19" class="reference"><a href="#cite_note-19"><span class="cite-bracket">[</span>19<span class="cite-bracket">]</span></a></sup> build a systemic risk measure named SRISK. SRISK can be interpreted as the amount of capital that needs to be injected into a financial firm as to restore a certain form of minimal capital requirement. SRISK has several nice properties: SRISK is expressed in monetary terms and is, therefore, easy to interpret. SRISK can be easily aggregated across firms to provide industry and even country specific aggregates. Last, the computation of SRISK involves variables which may be viewed on their own as risk measures. These are the size of the financial firm, the leverage (ratio of assets to market capitalization), and a measure of how the return of the firm evolves with the market (some sort of time varying conditional <a href="/wiki/Beta_(finance)" title="Beta (finance)">beta</a> but with emphasis on the tail of the distribution). </p><p>Whereas the initial Brownlees and Engle model is tailored to the US market, the extension by Engle, Jondeau, and Rockinger<sup id="cite_ref-20" class="reference"><a href="#cite_note-20"><span class="cite-bracket">[</span>20<span class="cite-bracket">]</span></a></sup> is more suitable for the European markets. One factor captures worldwide variations of financial markets, another one the variations of European markets. This extension allows for a country-specific factor. </p><p>By accounting for different factors, one captures the notion that shocks to the US or Asian markets may affect Europe, but also that bad news within Europe (such as the news about a potential default of one of the countries) matters for Europe. Also, there may be country specific news that does not affect Europe or the US, but matters for a given country. Empirically the last factor is less relevant than the worldwide or European factor. </p><p>Since SRISK is measured in terms of currency, the industry aggregates may also be related to <a href="/wiki/Gross_Domestic_Product" class="mw-redirect" title="Gross Domestic Product">Gross Domestic Product</a>. As such one obtains a measure of domestic, systemically important banks. </p><p>The SRISK Systemic Risk Indicator is computed automatically on a weekly basis and made available to the community. For the US model, SRISK and other statistics may be found under the <a rel="nofollow" class="external text" href="http://vlab.stern.nyu.edu/">Volatility Lab of NYU Stern School</a> website and for the European model under the <a rel="nofollow" class="external text" href="http://www.crml.ch/">Center of Risk Management (CRML)</a> website of HEC Lausanne. </p> <div class="mw-heading mw-heading4"><h4 id="Pair/vine_copulas"><span id="Pair.2Fvine_copulas"></span>Pair/vine copulas</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=8" title="Edit section: Pair/vine copulas"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>A <a href="/wiki/Vine_copula" title="Vine copula">vine copula</a> can be used to model systemic risk across a portfolio of financial assets. One methodology is to apply the Clayton Canonical Vine Copula to model asset pairs in the vine structure framework. As a Clayton copula is used, the greater the degree of asymmetric (i.e., left tail) dependence, the higher the Clayton copula parameter. Therefore, one can sum up all the Clayton Copula parameters, and the higher the sum of these parameters, the greater the impending likelihood of systemic risk. This methodology has been found to detect spikes in the US equities markets in the last four decades capturing the Oil Crisis and Energy Crisis of the 1970s, Black Monday and the Gulf War in the 1980s, the Russian Default/LTCM crisis of the 1990s, and the Technology Bubble and Lehman Default in the 2000s.<sup id="cite_ref-21" class="reference"><a href="#cite_note-21"><span class="cite-bracket">[</span>21<span class="cite-bracket">]</span></a></sup> Manzo and Picca<sup id="cite_ref-22" class="reference"><a href="#cite_note-22"><span class="cite-bracket">[</span>22<span class="cite-bracket">]</span></a></sup> introduce the t-Student Distress Insurance Premium (tDIP), a copula-based method that measures systemic risk as the expected tail loss on a credit portfolio of entities, in order to quantify sovereign as well as financial systemic risk in Europe. </p> <div class="mw-heading mw-heading2"><h2 id="Valuation_of_assets_and_derivatives_under_systemic_risk">Valuation of assets and derivatives under systemic risk</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=9" title="Edit section: Valuation of assets and derivatives under systemic risk"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <div class="mw-heading mw-heading3"><h3 id="Inadequacy_of_classic_valuation_models">Inadequacy of classic valuation models</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=10" title="Edit section: Inadequacy of classic valuation models"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>One problem when it comes to the valuation of derivatives, debt, or equity under systemic risk is that financial interconnectedness has to be modelled. One particular problem is posed by closed valuations chains, as exemplified here for four firms A, B, C, and D: </p> <dl><dd>B might hold shares of A, C holds some debt of B, D owns a derivative issued by C, and A owns some debt of D.<sup id="cite_ref-Fischer_(2014b)_23-0" class="reference"><a href="#cite_note-Fischer_(2014b)-23"><span class="cite-bracket">[</span>23<span class="cite-bracket">]</span></a></sup></dd></dl> <p>For instance, the share price of A could influence all other asset values, including itself. </p> <div class="mw-heading mw-heading4"><h4 id="The_Merton_(1974)_model"><span id="The_Merton_.281974.29_model"></span>The Merton (1974) model</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=11" title="Edit section: The Merton (1974) model"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Situations as the one explained earlier, which are present in mature financial markets, cannot be modelled within the single-firm <a href="/wiki/Merton_model" title="Merton model">Merton model</a>,<sup id="cite_ref-Merton_(1974)_24-0" class="reference"><a href="#cite_note-Merton_(1974)-24"><span class="cite-bracket">[</span>24<span class="cite-bracket">]</span></a></sup> but also not by its straightforward extensions to multiple firms with potentially correlated assets.<sup id="cite_ref-Fischer_(2014b)_23-1" class="reference"><a href="#cite_note-Fischer_(2014b)-23"><span class="cite-bracket">[</span>23<span class="cite-bracket">]</span></a></sup> To demonstrate this, consider two financial firms, <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle i=1,2}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mi>i</mi> <mo>=</mo> <mn>1</mn> <mo>,</mo> <mn>2</mn> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle i=1,2}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/608b3c5e448c465889913a88a105e38e7316fba7" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:7.26ex; height:2.509ex;" alt="{\displaystyle i=1,2}"></span>, with limited liability, which both own system-exogenous assets of a value <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle a_{i}\geq 0}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>≥</mo> <mn>0</mn> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle a_{i}\geq 0}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/6aefe5d34ff87d51c5218190cb4139ec9e35d8a9" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:6.29ex; height:2.509ex;" alt="{\displaystyle a_{i}\geq 0}"></span> at a maturity <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle T\geq 0}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mi>T</mi> <mo>≥</mo> <mn>0</mn> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle T\geq 0}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/07251f925ce3c2848edcc56971479a8ac6f5f811" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.505ex; width:5.897ex; height:2.343ex;" alt="{\displaystyle T\geq 0}"></span>, and which both owe a single amount of zero coupon debt <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle d_{i}\geq 0}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>≥</mo> <mn>0</mn> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle d_{i}\geq 0}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/d8498e3511f0f889cd5301ab4bb23cd064e3af35" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:6.27ex; height:2.509ex;" alt="{\displaystyle d_{i}\geq 0}"></span>, due at time <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle T}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mi>T</mi> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle T}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/ec7200acd984a1d3a3d7dc455e262fbe54f7f6e0" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.338ex; width:1.636ex; height:2.176ex;" alt="{\displaystyle T}"></span>. "System-exogenous" here refers to the assumption, that the business asset <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle a_{i}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle a_{i}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/0bc77764b2e74e64a63341054fa90f3e07db275f" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:2.029ex; height:2.009ex;" alt="{\displaystyle a_{i}}"></span> is not influenced by the firms in the considered financial system. In the classic single firm Merton model,<sup id="cite_ref-Merton_(1974)_24-1" class="reference"><a href="#cite_note-Merton_(1974)-24"><span class="cite-bracket">[</span>24<span class="cite-bracket">]</span></a></sup> it now holds at maturity for the equity <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle s_{i}\geq 0}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>≥</mo> <mn>0</mn> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle s_{i}\geq 0}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/b62908e91b85a93d9c1a8d269c9a19e06c1031cb" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:6.151ex; height:2.509ex;" alt="{\displaystyle s_{i}\geq 0}"></span> and for the recovery value <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle r_{i}\geq 0}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>≥</mo> <mn>0</mn> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle r_{i}\geq 0}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/3437af25b156b600d15e24146844e13e58cc47b5" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:6.109ex; height:2.509ex;" alt="{\displaystyle r_{i}\geq 0}"></span> of the debt, that </p> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle r_{i}=\min\{d_{i},a_{i}\}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>=</mo> <mo movablelimits="true" form="prefix">min</mo> <mo fence="false" stretchy="false">{</mo> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>,</mo> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo fence="false" stretchy="false">}</mo> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle r_{i}=\min\{d_{i},a_{i}\}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/9d068688831d8b9d3cee9c85add33dbdfc4d4d54" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.838ex; width:16.219ex; height:2.843ex;" alt="{\displaystyle r_{i}=\min\{d_{i},a_{i}\}}"></span></dd></dl> <p>and </p> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle s_{i}=(a_{i}-d_{i})^{+}.}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>=</mo> <mo stretchy="false">(</mo> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <mo>−</mo> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> <msup> <mo stretchy="false">)</mo> <mrow class="MJX-TeXAtom-ORD"> <mo>+</mo> </mrow> </msup> <mo>.</mo> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle s_{i}=(a_{i}-d_{i})^{+}.}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/d543ea2e7a76d26bafc8b674ac52d620b65656e6" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.838ex; width:15.834ex; height:3.009ex;" alt="{\displaystyle s_{i}=(a_{i}-d_{i})^{+}.}"></span></dd></dl> <p>Equity and debt recovery value, <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle s_{i}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle s_{i}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/cfda82668232cbdc0874ed28ab8b6079420d1ffe" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:1.89ex; height:2.009ex;" alt="{\displaystyle s_{i}}"></span> and <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle r_{i}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle r_{i}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/a0b6d651eaf432dbf1f106021c8bb499ae83fd1f" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:1.848ex; height:2.009ex;" alt="{\displaystyle r_{i}}"></span>, are thus uniquely and immediately determined by the value <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle a_{i}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle a_{i}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/0bc77764b2e74e64a63341054fa90f3e07db275f" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:2.029ex; height:2.009ex;" alt="{\displaystyle a_{i}}"></span> of the exogenous business assets. Assuming that the <span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle a_{i}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mi>i</mi> </mrow> </msub> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle a_{i}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/0bc77764b2e74e64a63341054fa90f3e07db275f" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.671ex; width:2.029ex; height:2.009ex;" alt="{\displaystyle a_{i}}"></span> are, for instance, defined by a Black-Scholes dynamic (with or without correlations), risk-neutral no-arbitrage pricing of debt and equity is straightforward. </p> <div class="mw-heading mw-heading4"><h4 id="Non-trivial_asset_value_equations">Non-trivial asset value equations</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=12" title="Edit section: Non-trivial asset value equations"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Consider now again two such firms, but assume that firm 1 owns 5% of firm two's equity and 20% of its debt. Similarly, assume that firm 2 owns 3% of firm one's equity and 10% of its debt. The equilibrium price equations, or liquidation value equations,<sup id="cite_ref-Fischer_(2014a)_25-0" class="reference"><a href="#cite_note-Fischer_(2014a)-25"><span class="cite-bracket">[</span>25<span class="cite-bracket">]</span></a></sup> at maturity are now given by </p> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle r_{1}=\min\{d_{1},a_{1}+0.05s_{2}+0.2r_{2}\}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>=</mo> <mo movablelimits="true" form="prefix">min</mo> <mo fence="false" stretchy="false">{</mo> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>,</mo> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>+</mo> <mn>0.05</mn> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>+</mo> <mn>0.2</mn> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo fence="false" stretchy="false">}</mo> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle r_{1}=\min\{d_{1},a_{1}+0.05s_{2}+0.2r_{2}\}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/4191e2fb17bb469a6e356c58117c13701b1259c9" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.838ex; width:34.017ex; height:2.843ex;" alt="{\displaystyle r_{1}=\min\{d_{1},a_{1}+0.05s_{2}+0.2r_{2}\}}"></span></dd> <dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle r_{2}=\min\{d_{2},a_{2}+0.03s_{1}+0.1r_{1}\}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>=</mo> <mo movablelimits="true" form="prefix">min</mo> <mo fence="false" stretchy="false">{</mo> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>,</mo> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>+</mo> <mn>0.03</mn> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>+</mo> <mn>0.1</mn> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo fence="false" stretchy="false">}</mo> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle r_{2}=\min\{d_{2},a_{2}+0.03s_{1}+0.1r_{1}\}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/157763cb6d24af3b94006f3a025a3c3c4bba765f" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.838ex; width:34.017ex; height:2.843ex;" alt="{\displaystyle r_{2}=\min\{d_{2},a_{2}+0.03s_{1}+0.1r_{1}\}}"></span></dd> <dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle s_{1}=(a_{1}+0.05s_{2}+0.2r_{2}-d_{1})^{+}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>=</mo> <mo stretchy="false">(</mo> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>+</mo> <mn>0.05</mn> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>+</mo> <mn>0.2</mn> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>−</mo> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <msup> <mo stretchy="false">)</mo> <mrow class="MJX-TeXAtom-ORD"> <mo>+</mo> </mrow> </msup> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle s_{1}=(a_{1}+0.05s_{2}+0.2r_{2}-d_{1})^{+}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/8aff0027cc56d286e93a8931c7907d33e9a8093d" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.838ex; width:32.985ex; height:3.009ex;" alt="{\displaystyle s_{1}=(a_{1}+0.05s_{2}+0.2r_{2}-d_{1})^{+}}"></span></dd> <dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle s_{2}=(a_{2}+0.03s_{1}+0.1r_{1}-d_{2})^{+}.}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>=</mo> <mo stretchy="false">(</mo> <msub> <mi>a</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <mo>+</mo> <mn>0.03</mn> <msub> <mi>s</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>+</mo> <mn>0.1</mn> <msub> <mi>r</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>1</mn> </mrow> </msub> <mo>−</mo> <msub> <mi>d</mi> <mrow class="MJX-TeXAtom-ORD"> <mn>2</mn> </mrow> </msub> <msup> <mo stretchy="false">)</mo> <mrow class="MJX-TeXAtom-ORD"> <mo>+</mo> </mrow> </msup> <mo>.</mo> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle s_{2}=(a_{2}+0.03s_{1}+0.1r_{1}-d_{2})^{+}.}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/d7bde1922a667d1a29eddc6a381c4cfff0c240a7" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -0.838ex; width:33.632ex; height:3.009ex;" alt="{\displaystyle s_{2}=(a_{2}+0.03s_{1}+0.1r_{1}-d_{2})^{+}.}"></span></dd></dl> <p>This example demonstrates, that systemic risk in the form of financial interconnectedness can already lead to a non-trivial, non-linear equation system for the asset values if only two firms are involved. </p> <div class="mw-heading mw-heading4"><h4 id="Over-_and_underestimation_of_default_probabilities">Over- and underestimation of default probabilities</h4><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=13" title="Edit section: Over- and underestimation of default probabilities"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>It is known that modelling credit risk while ignoring cross-holdings of debt or equity can lead to an under-, but also an over-estimation of default probabilities.<sup id="cite_ref-26" class="reference"><a href="#cite_note-26"><span class="cite-bracket">[</span>26<span class="cite-bracket">]</span></a></sup> The need for proper structural models of financial interconnectedness in quantitative risk management – be it in research or practice – is therefore obvious. </p> <div class="mw-heading mw-heading3"><h3 id="Structural_models_under_financial_interconnectedness">Structural models under financial interconnectedness</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=14" title="Edit section: Structural models under financial interconnectedness"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>The first authors to consider structural models for financial systems where each firm could own the debt of other firms were Eisenberg and Noe in 2001.<sup id="cite_ref-27" class="reference"><a href="#cite_note-27"><span class="cite-bracket">[</span>27<span class="cite-bracket">]</span></a></sup> Suzuki (2002) extended the analysis of interconnectedness by modeling the cross ownership of both debt and equity claims.<sup id="cite_ref-Suzuki_(2002)2_28-0" class="reference"><a href="#cite_note-Suzuki_(2002)2-28"><span class="cite-bracket">[</span>28<span class="cite-bracket">]</span></a></sup> Building on Eisenberg and Noe (2001), Cifuentes, Ferrucci, and Shin (2005) considered the effect of costs of default on network stability.<sup id="cite_ref-Cifuentes,_Ferrucci,_and_Shin_(2005)2_29-0" class="reference"><a href="#cite_note-Cifuentes,_Ferrucci,_and_Shin_(2005)2-29"><span class="cite-bracket">[</span>29<span class="cite-bracket">]</span></a></sup> Elsinger's further developed the Eisenberg and Noe (2001) model by incorporating financial claims of differing priority.<sup id="cite_ref-Elsinger_(2009)3_30-0" class="reference"><a href="#cite_note-Elsinger_(2009)3-30"><span class="cite-bracket">[</span>30<span class="cite-bracket">]</span></a></sup> </p><p>Acemoglu, Ozdaglar, and Tahbaz-Salehi, (2015) developed a structural systemic risk model incorporating both distress costs and debt claim with varying priorities and used this model to examine the effects of network interconnectedness on financial stability. They showed that, up to a certain point, interconnectedness enhances financial stability. However, once a critical threshold density of connectedness is exceeded, further increases in the density of the financial network propagate risk.<sup id="cite_ref-Acemoglu,_Ozdaglar,_and_Tahbaz-Salehi,_(2001)2_31-0" class="reference"><a href="#cite_note-Acemoglu,_Ozdaglar,_and_Tahbaz-Salehi,_(2001)2-31"><span class="cite-bracket">[</span>31<span class="cite-bracket">]</span></a></sup> </p><p>Glasserman and Young (2015) applied the Eisenberg and Noe (2001) to modelling the effect of shocks to banking networks. They develop general bounds for the effects of network connectivity on default probabilities. In contrast to most of the structural systemic risk literature, their results are quite general and do not require assuming a specific network architecture or specific shock distributions.<sup id="cite_ref-Glasserman_and_Young(2015)3_32-0" class="reference"><a href="#cite_note-Glasserman_and_Young(2015)3-32"><span class="cite-bracket">[</span>32<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading3"><h3 id="Risk-neutral_valuation:_price_indeterminacy_and_open_problems">Risk-neutral valuation: price indeterminacy and open problems</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=15" title="Edit section: Risk-neutral valuation: price indeterminacy and open problems"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Generally speaking, risk-neutral pricing in structural models of financial interconnectedness requires unique equilibrium prices at maturity in dependence of the exogenous asset price vector, which can be random. While financially interconnected systems with debt and equity cross-ownership without derivatives are fairly well understood in the sense that relatively weak conditions on the ownership structures in the form of ownership matrices are required to warrant uniquely determined price equilibria,<sup id="cite_ref-Fischer_(2014b)_23-2" class="reference"><a href="#cite_note-Fischer_(2014b)-23"><span class="cite-bracket">[</span>23<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-Suzuki_(2002)2_28-1" class="reference"><a href="#cite_note-Suzuki_(2002)2-28"><span class="cite-bracket">[</span>28<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-Elsinger_(2009)3_30-1" class="reference"><a href="#cite_note-Elsinger_(2009)3-30"><span class="cite-bracket">[</span>30<span class="cite-bracket">]</span></a></sup> the Fischer (2014) model needs very strong conditions on derivatives – which are defined in dependence on any other liability of the considered financial system – to be able to guarantee uniquely determined prices of all system-endogenous liabilities. Furthermore, it is known that there exist examples with no solutions at all, finitely many solutions (more than one), and infinitely many solutions.<sup id="cite_ref-Fischer_(2014b)_23-3" class="reference"><a href="#cite_note-Fischer_(2014b)-23"><span class="cite-bracket">[</span>23<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-Fischer_(2014a)_25-1" class="reference"><a href="#cite_note-Fischer_(2014a)-25"><span class="cite-bracket">[</span>25<span class="cite-bracket">]</span></a></sup> At present, it is unclear how weak conditions on derivatives can be chosen to still be able to apply risk-neutral pricing in financial networks with systemic risk. It is noteworthy, that the price indeterminacy that evolves from multiple price equilibria is fundamentally different from price indeterminacy that stems from market incompleteness.<sup id="cite_ref-Fischer_(2014a)_25-2" class="reference"><a href="#cite_note-Fischer_(2014a)-25"><span class="cite-bracket">[</span>25<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Factors">Factors</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=16" title="Edit section: Factors"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Factors that are found to support systemic risks<sup id="cite_ref-Factors_of_Systemic_Risk_33-0" class="reference"><a href="#cite_note-Factors_of_Systemic_Risk-33"><span class="cite-bracket">[</span>33<span class="cite-bracket">]</span></a></sup> are: </p> <ol><li>Economic implications of models are not well understood. Though each individual model may be made accurate, the facts that (1) all models across the board use the same theoretical basis, and (2) the relationship between financial markets and the economy is not known lead to aggravation of systemic risks.</li> <li>Liquidity risks are not accounted for in pricing models used in trading on the financial markets. Since all models are not geared towards this scenario, all participants in an illiquid market using such models will face systemic risks.</li></ol> <div class="mw-heading mw-heading2"><h2 id="Diversification">Diversification</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=17" title="Edit section: Diversification"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Risks can be reduced in four main ways: avoidance, diversification, hedging and insurance by transferring risk. Systematic risk, also called <a href="/wiki/Market_risk" title="Market risk">market risk</a> or un-diversifiable risk, is a <a href="/wiki/Risk" title="Risk">risk</a> of a <a href="/wiki/Security_(finance)" title="Security (finance)">security</a> that cannot be reduced through <a href="/wiki/Diversification_(finance)" title="Diversification (finance)">diversification</a>. Participants in the market, like <a href="/wiki/Hedge_fund" title="Hedge fund">hedge funds</a>, can be the source of an increase in systemic risk<sup id="cite_ref-34" class="reference"><a href="#cite_note-34"><span class="cite-bracket">[</span>34<span class="cite-bracket">]</span></a></sup> and the transfer of risk to them may, paradoxically, increase the exposure to systemic risk. </p><p>Until recently, many theoretical models of finance pointed towards the stabilizing effects of a diversified (i.e., dense) financial system. Nevertheless, some recent work has started to challenge this view, investigating conditions under which diversification may have ambiguous effects on systemic risk.<sup id="cite_ref-35" class="reference"><a href="#cite_note-35"><span class="cite-bracket">[</span>35<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-Diversification_and_Financial_Stability_36-0" class="reference"><a href="#cite_note-Diversification_and_Financial_Stability-36"><span class="cite-bracket">[</span>36<span class="cite-bracket">]</span></a></sup> Within a certain range, financial interconnections serve as a shock-absorber (i.e., connectivity engenders robustness and risk-sharing prevails). But beyond the tipping point, interconnections might serve as a shock-amplifier (i.e., connectivity engenders fragility and risk-spreading prevails). </p> <div class="mw-heading mw-heading2"><h2 id="Regulation">Regulation</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=18" title="Edit section: Regulation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>One of the main reasons for regulation in the marketplace is to reduce systemic risk.<sup id="cite_ref-CRMPG3_6-3" class="reference"><a href="#cite_note-CRMPG3-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup> However, regulation arbitrage – the transfer of commerce from a regulated sector to a less regulated or unregulated sector – brings markets a full circle and restores systemic risk. For example, the banking sector was brought under regulations in order to reduce systemic risks.<sup id="cite_ref-37" class="reference"><a href="#cite_note-37"><span class="cite-bracket">[</span>37<span class="cite-bracket">]</span></a></sup> Since the banks themselves could not give credit where the risk (and therefore returns) were high, it was primarily the insurance sector which took over such deals. Thus the systemic risk migrated from one sector to another and proves that regulation of only one industry cannot be the sole protection against systemic risks.<sup id="cite_ref-Systemic_Risk_and_Regulation_38-0" class="reference"><a href="#cite_note-Systemic_Risk_and_Regulation-38"><span class="cite-bracket">[</span>38<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Project_risks">Project risks</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=19" title="Edit section: Project risks"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>In the fields of <a href="/wiki/Project_management" title="Project management">project management</a> and <a href="/wiki/Cost_engineering" title="Cost engineering">cost engineering</a>, systemic risks include those risks that are not unique to a particular project and are not readily manageable by a project team at a given point in time. They are caused by micro or internal factors i.e. uncertainty resulting from attributes of the project system/culture. Some use the term inherent risk. These systemic risks are called individual project risks e.g. in PMI PMBOK(R) Guide. These risks may be driven by the nature of a company's project system (e.g., funding projects before the scope is defined), capabilities, or culture. They may also be driven by the level of technology in a project or the complexity of a project's scope or execution strategy.<sup id="cite_ref-39" class="reference"><a href="#cite_note-39"><span class="cite-bracket">[</span>39<span class="cite-bracket">]</span></a></sup> One recent example of systemic risk is the collapse of Lehman Brothers in 2008, which sent shockwaves throughout the financial system and the economy.<sup id="cite_ref-investopedia.com_40-0" class="reference"><a href="#cite_note-investopedia.com-40"><span class="cite-bracket">[</span>40<span class="cite-bracket">]</span></a></sup> In contrast, those risks that are unique to a particular project are called overall project risks aka systematic risks in finance terminology. They are project-specific risks which are sometimes called contingent risks, or risk events. These systematic risks are caused by uncertainty in macro or external factors of the external environment. "The Great Recession" of the late 2000s is an example of systematic risk.<sup id="cite_ref-investopedia.com_40-1" class="reference"><a href="#cite_note-investopedia.com-40"><span class="cite-bracket">[</span>40<span class="cite-bracket">]</span></a></sup> Overall project risks are determined using PESTLE, VUCA, etc. </p><p>PMI PMBOK(R) Guide defines individual project risk as "an uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives," whereas overall project risk is defined as "the effect of uncertainty on the project as a whole … more than the sum of individual risks within a project, since it includes all sources of project uncertainty … represents the exposure of stakeholders to the implications of variations in project outcome, both positive and negative."<sup id="cite_ref-41" class="reference"><a href="#cite_note-41"><span class="cite-bracket">[</span>41<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Systemic_risk_and_insurance">Systemic risk and insurance</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=20" title="Edit section: Systemic risk and insurance"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>In February 2010, international insurance economics think tank, The Geneva Association, published a 110-page analysis of the role of insurers in systemic risk.<sup id="cite_ref-42" class="reference"><a href="#cite_note-42"><span class="cite-bracket">[</span>42<span class="cite-bracket">]</span></a></sup> </p><p>In the report, the differing roles of insurers and banks in the <a href="/wiki/Global_financial_system" title="Global financial system">global financial system</a> and their impact on the crisis are examined (See also CEA report, "Why Insurers Differ from Banks").<sup id="cite_ref-43" class="reference"><a href="#cite_note-43"><span class="cite-bracket">[</span>43<span class="cite-bracket">]</span></a></sup> A key conclusion of the analysis is that the core activities of insurers and reinsurers do not pose systemic risks due to the specific features of the industry: </p> <ul><li>Insurance is funded by up-front premia, giving insurers strong operating cash-flow without the requirement for wholesale funding;</li> <li>Insurance policies are generally long-term, with controlled outflows, enabling insurers to act as stabilisers to the financial system;</li> <li>During the hard test of the financial crisis, insurers maintained relatively steady capacity, business volumes and prices.</li></ul> <p>Applying the most commonly cited definition of systemic risk, that of the Financial Stability Board (FSB), to the core activities of insurers and reinsurers, the report concludes that none are systemically relevant for at least one of the following reasons: </p> <ul><li>Their limited size means that there would not be disruptive effects on financial markets;</li> <li>An insurance insolvency develops slowly and can often be absorbed by, for example, capital raising, or, in a worst case, an orderly wind down;</li> <li>The features of the interrelationships of insurance activities mean that contagion risk would be limited.</li></ul> <p>The report underlines that supervisors and policymakers should focus on activities rather than financial institutions when introducing new regulation and that upcoming insurance regulatory regimes, such as Solvency II in the European Union, already adequately address insurance activities. </p><p>However, during the financial crisis, a small number of quasi-banking activities conducted by insurers either caused failure or triggered significant difficulties. The report therefore identifies two activities which, when conducted on a widespread scale without proper risk control frameworks, have the potential for systemic relevance. </p> <ul><li>Derivatives trading on non-insurance balance sheets;</li> <li>Mis-management of short-term funding from commercial paper or <a href="/wiki/Securities_lending" title="Securities lending">securities lending</a>.</li></ul> <p>The industry has put forward five recommendations to address these particular activities and strengthen financial stability: </p> <ul><li>The implementation of a comprehensive, integrated and principle-based supervision framework for insurance groups, in order to capture, among other things, any non-insurance activities such as excessive derivative activities.</li> <li>Strengthening liquidity risk management, particularly to address potential mis-management issues related to short-term funding.</li> <li>Enhancement of the regulation of financial guarantee insurance, which has a very different business model than traditional insurance.</li> <li>The establishment of macro-prudential monitoring with appropriate insurance representation.</li> <li>The strengthening of industry risk management practices to build on the lessons learned by the industry and the sharing experiences with supervisors on a global scale.</li></ul> <p>Since the publication of The Geneva Association statement, in June 2010, the International Association of Insurance Supervisors (IAIS) issued its position statement on key financial stability issues. A key conclusion of the statement was that, "The insurance sector is susceptible to systemic risks generated in other parts of the financial sector. For most classes of insurance, however, there is little evidence of insurance either generating or amplifying systemic risk, within the financial system itself or in the real economy."<sup id="cite_ref-44" class="reference"><a href="#cite_note-44"><span class="cite-bracket">[</span>44<span class="cite-bracket">]</span></a></sup> </p><p>Other organisations such as the CEA and the Property Casualty Insurers Association of America (PCI)<sup id="cite_ref-45" class="reference"><a href="#cite_note-45"><span class="cite-bracket">[</span>45<span class="cite-bracket">]</span></a></sup> have issued reports on the same subject. </p> <div class="mw-heading mw-heading2"><h2 id="Discussion">Discussion</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=21" title="Edit section: Discussion"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Systemic risk evaluates the likelihood and degree of negative consequences to the larger body. The term "systemic risk" is frequently used in recent discussions related to the economic crisis, such as the <a href="/wiki/Subprime_mortgage_crisis" title="Subprime mortgage crisis">Subprime mortgage crisis</a>. The systemic risk of a financial institution is the likelihood and the degree that the institution's activities will negatively affect the larger economy such that unusual and extreme federal intervention would be required to ameliorate the effects. The failing of <a href="/wiki/Financial_crisis_of_2007%E2%80%932008" class="mw-redirect" title="Financial crisis of 2007–2008">financial firms in 2008</a> caused systemic risk to the larger economy. Chairman Barney Frank has expressed concerns regarding the vulnerability of highly leveraged financial systems to systemic risk and the US government has debated how to address financial services regulatory reform and systemic risk.<sup id="cite_ref-46" class="reference"><a href="#cite_note-46"><span class="cite-bracket">[</span>46<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-47" class="reference"><a href="#cite_note-47"><span class="cite-bracket">[</span>47<span class="cite-bracket">]</span></a></sup> </p><p>A series of empirical studies published between the 1990s and 2000s showed that deregulation and increasingly fierce competition lowers bank's profit margin and encourages the <a href="/wiki/Moral_hazard" title="Moral hazard">moral hazard</a> to take excessive credit risks to increase profits.<sup class="noprint Inline-Template Template-Fact" style="white-space:nowrap;">[<i><a href="/wiki/Wikipedia:Citation_needed" title="Wikipedia:Citation needed"><span title="This claim needs references to reliable sources. (October 2020)">citation needed</span></a></i>]</sup> On the other hand, the same effect was measured in presence of a banking <a href="/wiki/Oligopoly" title="Oligopoly">oligopoly</a> in which banking sector was dominated by a restricted number of market operators encouraged by their <a href="/wiki/Market_share" title="Market share">market share</a> and <a href="/wiki/Contractual_power" class="mw-redirect" title="Contractual power">contractual power</a> to set higher loan mean rates.<sup class="noprint Inline-Template Template-Fact" style="white-space:nowrap;">[<i><a href="/wiki/Wikipedia:Citation_needed" title="Wikipedia:Citation needed"><span title="This claim needs references to reliable sources. (October 2020)">citation needed</span></a></i>]</sup> An excessive number of market operators was sometimes deliberately introduced with a below market value selling to cause a <a href="/wiki/Price_war" title="Price war">price war</a> and a wave of bank massive failures, subsequently degenerating in the creation a market <a href="/wiki/Cartel_theory" title="Cartel theory">cartel</a>: those two phases had been seen as expressions of the same interest to collude at generally lower prices (and then higher), resulting possible because of a lack of regulation ordered to prevent both of them.<sup class="noprint Inline-Template Template-Fact" style="white-space:nowrap;">[<i><a href="/wiki/Wikipedia:Citation_needed" title="Wikipedia:Citation needed"><span title="This claim needs references to reliable sources. (October 2020)">citation needed</span></a></i>]</sup> <a href="/wiki/Banks" class="mw-redirect" title="Banks">Banks</a> are the entities most likely to be exposed to valuation risk as a result of their massive holdings of financial instruments classified as Level 2 or 3 of the fair value hierarchy. In Europe, at the end of 2020 the banks under the direct supervision of the <a href="/wiki/European_Central_Bank_(ECB)" class="mw-redirect" title="European Central Bank (ECB)">European Central Bank (ECB)</a> held fair-valued financial instruments in an amount of €8.7 trillion, of which €6.6 trillion classified as Level 2 or 3. Level 2 and Level 3 instruments respectively amounted to 495% and 23% of the banks' highest-quality capital (so-called Tier 1 Capital).<sup id="cite_ref-48" class="reference"><a href="#cite_note-48"><span class="cite-bracket">[</span>48<span class="cite-bracket">]</span></a></sup> As an implication, even small errors in such financial instruments' valuations may have significant impacts on banks' capital. </p><p>In February 2020 the <a href="/wiki/European_Systemic_Risk_Board" title="European Systemic Risk Board">European Systemic Risk Board</a> warned in a report that substantial amounts of financial instruments with complex features and limited liquidity that sit in banks' balance sheets are a source of risk for the stability of the global financial system.<sup id="cite_ref-49" class="reference"><a href="#cite_note-49"><span class="cite-bracket">[</span>49<span class="cite-bracket">]</span></a></sup> In Europe, at the end of 2020 the banks under the direct supervision of the <a href="/wiki/European_Central_Bank_(ECB)" class="mw-redirect" title="European Central Bank (ECB)">European Central Bank (ECB)</a> held financial instruments subject to <a href="/wiki/Fair_value_accounting" class="mw-redirect" title="Fair value accounting">fair value accounting</a> in an amount of €8.7 trillion. Of these, €6.6 trillion were classified as Level 2 or 3 in the so-called Fair Value Hierarchy, which means that they are potentially exposed to <a href="/wiki/Valuation_risk" title="Valuation risk">valuation risk</a>, i.e. to uncertainty about their actual market value. Level 2 and Level 3 instruments respectively amounted to 495% and 23% of the banks' highest-quality capital (so-called Tier 1 Capital).<sup id="cite_ref-50" class="reference"><a href="#cite_note-50"><span class="cite-bracket">[</span>50<span class="cite-bracket">]</span></a></sup> As an implication, even small errors in such financial instruments' valuations may have significant impacts on banks' capital. </p> <div class="mw-heading mw-heading2"><h2 id="See_also">See also</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=22" title="Edit section: See also"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <ul><li><a href="/wiki/Category:Systemic_risk" title="Category:Systemic risk">Category:Systemic risk</a></li> <li><a href="/wiki/Bank_run" title="Bank run">Bank run</a></li> <li><a href="/wiki/Financial_crisis" title="Financial crisis">Financial crisis</a></li> <li><a href="/wiki/Macroprudential_policy" class="mw-redirect" title="Macroprudential policy">Macroprudential policy</a></li> <li><a href="/wiki/Modern_portfolio_theory" title="Modern portfolio theory">Modern portfolio theory</a></li> <li><a href="/wiki/Moral_hazard" title="Moral hazard">Moral hazard</a></li> <li><a href="/wiki/Risk_modeling" class="mw-redirect" title="Risk modeling">Risk modeling</a></li> <li><a href="/wiki/Taleb_Distribution" class="mw-redirect" title="Taleb Distribution">Taleb Distribution</a></li> <li><a href="/wiki/Glass%E2%80%93Steagall_Act" class="mw-redirect" title="Glass–Steagall Act">Glass–Steagall Act</a></li> <li><a href="/wiki/Monetary_economics" title="Monetary economics">Monetary economics</a></li> <li><a href="/wiki/Internal_contradictions_of_capital_accumulation" title="Internal contradictions of capital accumulation">Internal contradictions of capital accumulation</a></li> <li><a href="/wiki/Systemically_important_financial_institution" title="Systemically important financial institution">Systemically important financial institution</a></li> <li><a href="/wiki/Valuation_risk" title="Valuation risk">Valuation risk</a></li></ul> <div class="mw-heading mw-heading2"><h2 id="Further_reading">Further reading</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Systemic_risk&action=edit&section=23" title="Edit section: Further reading"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <ul><li>Website dedicated to systemic risk: <a rel="nofollow" class="external free" href="http://www.systemic-risk-hub.org/">http://www.systemic-risk-hub.org/</a></li> <li><style data-mw-deduplicate="TemplateStyles:r1238218222">.mw-parser-output cite.citation{font-style:inherit;word-wrap:break-word}.mw-parser-output .citation q{quotes:"\"""\"""'""'"}.mw-parser-output .citation:target{background-color:rgba(0,127,255,0.133)}.mw-parser-output .id-lock-free.id-lock-free a{background:url("//upload.wikimedia.org/wikipedia/commons/6/65/Lock-green.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-limited.id-lock-limited a,.mw-parser-output .id-lock-registration.id-lock-registration a{background:url("//upload.wikimedia.org/wikipedia/commons/d/d6/Lock-gray-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-subscription.id-lock-subscription a{background:url("//upload.wikimedia.org/wikipedia/commons/a/aa/Lock-red-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .cs1-ws-icon a{background:url("//upload.wikimedia.org/wikipedia/commons/4/4c/Wikisource-logo.svg")right 0.1em center/12px no-repeat}body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-free a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-limited a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-registration a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-subscription a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .cs1-ws-icon a{background-size:contain;padding:0 1em 0 0}.mw-parser-output .cs1-code{color:inherit;background:inherit;border:none;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;color:var(--color-error,#d33)}.mw-parser-output .cs1-visible-error{color:var(--color-error,#d33)}.mw-parser-output .cs1-maint{display:none;color:#085;margin-left:0.3em}.mw-parser-output .cs1-kern-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right{padding-right:0.2em}.mw-parser-output .citation .mw-selflink{font-weight:inherit}@media screen{.mw-parser-output .cs1-format{font-size:95%}html.skin-theme-clientpref-night .mw-parser-output .cs1-maint{color:#18911f}}@media screen and (prefers-color-scheme:dark){html.skin-theme-clientpref-os .mw-parser-output .cs1-maint{color:#18911f}}</style><cite id="CITEREFBartramBrown,_Gregory_W.Hund,_John2007" class="citation journal cs1">Bartram, Söhnke M.; Brown, Gregory W.; Hund, John (December 2007). <a rel="nofollow" class="external text" href="https://gates.comm.virginia.edu/uvafinanceseminar/2005-BartramPaper.pdf">"Estimating Systemic Risk in the International Financial System"</a> <span class="cs1-format">(PDF)</span>. <i>Journal of Financial Economics</i>. <b>86</b> (3): 835–869. <a href="/wiki/CiteSeerX_(identifier)" class="mw-redirect" title="CiteSeerX (identifier)">CiteSeerX</a> <span class="id-lock-free" title="Freely accessible"><a rel="nofollow" class="external text" href="https://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.1033.2966">10.1.1.1033.2966</a></span>. <a href="/wiki/Doi_(identifier)" class="mw-redirect" title="Doi (identifier)">doi</a>:<a rel="nofollow" class="external text" href="https://doi.org/10.1016%2Fj.jfineco.2006.10.001">10.1016/j.jfineco.2006.10.001</a>. <a href="/wiki/S2CID_(identifier)" class="mw-redirect" title="S2CID (identifier)">S2CID</a> <a rel="nofollow" class="external text" href="https://api.semanticscholar.org/CorpusID:6589252">6589252</a>. <a href="/wiki/SSRN_(identifier)" class="mw-redirect" title="SSRN (identifier)">SSRN</a> <a rel="nofollow" class="external text" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=938707">938707</a>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.jtitle=Journal+of+Financial+Economics&rft.atitle=Estimating+Systemic+Risk+in+the+International+Financial+System&rft.volume=86&rft.issue=3&rft.pages=835-869&rft.date=2007-12&rft_id=https%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fsummary%3Fdoi%3D10.1.1.1033.2966%23id-name%3DCiteSeerX&rft_id=https%3A%2F%2Fapi.semanticscholar.org%2FCorpusID%3A6589252%23id-name%3DS2CID&rft_id=https%3A%2F%2Fpapers.ssrn.com%2Fsol3%2Fpapers.cfm%3Fabstract_id%3D938707%23id-name%3DSSRN&rft_id=info%3Adoi%2F10.1016%2Fj.jfineco.2006.10.001&rft.aulast=Bartram&rft.aufirst=S%C3%B6hnke+M.&rft.au=Brown%2C+Gregory+W.&rft.au=Hund%2C+John&rft_id=https%3A%2F%2Fgates.comm.virginia.edu%2Fuvafinanceseminar%2F2005-BartramPaper.pdf&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></li> <li><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFContMoussa,_AmalSantos,_Edson_B2013" class="citation book cs1">Cont, Rama; 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Jobst, 2011, "Systemic Contingent Claims Analysis – A Model Approach to Systemic Risk," in: LaBrosse, John R., Olivares-Caminal, Rodrigo and Dalvinder Singh (eds.) <i>Managing Risk in the Financial System</i> (London: Edward Elgar), pp. 93–110.</li> <li><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFGrayJobstMalone2010" class="citation journal cs1">Gray, Dale F.; Jobst, Andreas A.; Malone, Samuel (2010). "Quantifying Systemic Risk and Reconceptualizing the Role of Finance for Economic Growth". <i>Journal of Investment Management</i>. <b>8</b> (2): 90–110.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.jtitle=Journal+of+Investment+Management&rft.atitle=Quantifying+Systemic+Risk+and+Reconceptualizing+the+Role+of+Finance+for+Economic+Growth&rft.volume=8&rft.issue=2&rft.pages=90-110&rft.date=2010&rft.aulast=Gray&rft.aufirst=Dale+F.&rft.au=Jobst%2C+Andreas+A.&rft.au=Malone%2C+Samuel&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></li> <li><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFHansen" class="citation web cs1">Hansen, Lars Peter. <a rel="nofollow" class="external text" href="https://www.nber.org/chapters/c12507.pdf">"Challenges in Identifying and Measuring Systemic Risk"</a> <span class="cs1-format">(PDF)</span>. National Bureau of Economic Research<span class="reference-accessdate">. Retrieved <span class="nowrap">6 March</span> 2013</span>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=unknown&rft.btitle=Challenges+in+Identifying+and+Measuring+Systemic+Risk&rft.pub=National+Bureau+of+Economic+Research&rft.aulast=Hansen&rft.aufirst=Lars+Peter&rft_id=https%3A%2F%2Fwww.nber.org%2Fchapters%2Fc12507.pdf&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></li> <li><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFIlinVarga2015" class="citation journal cs1">Ilin, Thomas; Varga, Liz (2015). "The uncertainty of systemic risk". <i>Risk Management</i>. <b>17</b> (4): 240–275. <a href="/wiki/Doi_(identifier)" class="mw-redirect" title="Doi (identifier)">doi</a>:<a rel="nofollow" class="external text" href="https://doi.org/10.1057%2Frm.2015.15">10.1057/rm.2015.15</a>. <a href="/wiki/S2CID_(identifier)" class="mw-redirect" title="S2CID (identifier)">S2CID</a> <a rel="nofollow" class="external text" href="https://api.semanticscholar.org/CorpusID:155209532">155209532</a>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.jtitle=Risk+Management&rft.atitle=The+uncertainty+of+systemic+risk&rft.volume=17&rft.issue=4&rft.pages=240-275&rft.date=2015&rft_id=info%3Adoi%2F10.1057%2Frm.2015.15&rft_id=https%3A%2F%2Fapi.semanticscholar.org%2FCorpusID%3A155209532%23id-name%3DS2CID&rft.aulast=Ilin&rft.aufirst=Thomas&rft.au=Varga%2C+Liz&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></li> <li>Jobst, Andreas A., 2012, "Systemic Risk in the Insurance Sector-General Issues and a First Assessment of Large Commercial (Re-)Insurers in Bermuda," Working paper (March 14). <a href="/wiki/SSRN_(identifier)" class="mw-redirect" title="SSRN (identifier)">SSRN</a> <a rel="nofollow" class="external text" href="https://ssrn.com/abstract=2022062">2022062</a>.</li> <li><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFOrlando,_GiuseppeBufalo_MichelePenikas_HenryZurlo_Concetta2022" class="citation book cs1">Orlando, Giuseppe; Bufalo Michele; Penikas Henry; Zurlo Concetta (2022). <i>Modern Financial Engineering: Counterparty, Credit, Portfolio and Systemic Risks</i>. 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Retrieved <span class="nowrap">2007-12-29</span></span>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=unknown&rft.btitle=Systemic+Risks+in+Projects&rft_id=http%3A%2F%2Fwww.c4ce.com%2FAACE_Risk_Hollmann_paper.pdf&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></span> </li> <li id="cite_note-investopedia.com-40"><span class="mw-cite-backlink">^ <a href="#cite_ref-investopedia.com_40-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-investopedia.com_40-1"><sup><i><b>b</b></i></sup></a></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://www.investopedia.com/ask/answers/09/systemic-systematic-risk.asp">"Learn How Systemic and Systematic Risk Are Both Threats to Investors"</a>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=unknown&rft.btitle=Learn+How+Systemic+and+Systematic+Risk+Are+Both+Threats+to+Investors&rft_id=https%3A%2F%2Fwww.investopedia.com%2Fask%2Fanswers%2F09%2Fsystemic-systematic-risk.asp&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></span> </li> <li id="cite_note-41"><span class="mw-cite-backlink"><b><a href="#cite_ref-41">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://www.pmi.org/learning/library/overall-project-risk-assessment-models-1386">"Managing overall project risk"</a>.</cite><span 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Insurance: a unique sector—Why Insurers Differ from Banks</a></span> </li> <li id="cite_note-44"><span class="mw-cite-backlink"><b><a href="#cite_ref-44">^</a></b></span> <span class="reference-text">IAIS (June 2010) <a rel="nofollow" class="external text" href="http://www.iaisweb.org/__temp/IAIS_Position_Statement_on_Key_Financial_Stability_Issues.pdf">International Association of Insurance Supervisors (IAIS) position statement on key financial stability issues</a></span> </li> <li id="cite_note-45"><span class="mw-cite-backlink"><b><a href="#cite_ref-45">^</a></b></span> <span class="reference-text">PCI (2009) <a rel="nofollow" class="external text" href="http://www.pciaa.net/web/sitehome.nsf/lcpublic/392/$file/PCI_Systemic_Risk_Definition.pdf">Systemic Risk Defined</a></span> </li> <li id="cite_note-46"><span class="mw-cite-backlink"><b><a href="#cite_ref-46">^</a></b></span> <span class="reference-text"><a rel="nofollow" class="external text" href="http://www.pciaa.net/Publish/Web/webpress.nsf/lookupwebcontent/F885A1302118898E8625755A007BC48?opendocument">Systemic Risk Focus</a></span> </li> <li id="cite_note-47"><span class="mw-cite-backlink"><b><a href="#cite_ref-47">^</a></b></span> <span class="reference-text"><a rel="nofollow" class="external text" href="http://www.pciaa.net/Publish/Web/webpress.nsf/lookupwebcontent/BDACACC7FE8E86B28625755A005C8C5?opendocument">Addressing Systemic Risk</a></span> </li> <li id="cite_note-48"><span class="mw-cite-backlink"><b><a href="#cite_ref-48">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFBank2021" class="citation journal cs1">Bank, European Central (19 May 2021). <a rel="nofollow" class="external text" href="https://www.bankingsupervision.europa.eu/press/publications/newsletter/2021/html/ssm.nl210519_5.en.html">"ECB, Supervision Newsletter - Room for improving valuation risk management, May 2021"</a>. <i>European Central Bank</i>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.jtitle=European+Central+Bank&rft.atitle=ECB%2C+Supervision+Newsletter+-+Room+for+improving+valuation+risk+management%2C+May+2021&rft.date=2021-05-19&rft.aulast=Bank&rft.aufirst=European+Central&rft_id=https%3A%2F%2Fwww.bankingsupervision.europa.eu%2Fpress%2Fpublications%2Fnewsletter%2F2021%2Fhtml%2Fssm.nl210519_5.en.html&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></span> </li> <li id="cite_note-49"><span class="mw-cite-backlink"><b><a href="#cite_ref-49">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" 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rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFBank2021" class="citation journal cs1">Bank, European Central (19 May 2021). <a rel="nofollow" class="external text" href="https://www.bankingsupervision.europa.eu/press/publications/newsletter/2021/html/ssm.nl210519_5.en.html">"ECB, Supervision Newsletter - Room for improving valuation risk management, May 2021"</a>. <i>European Central Bank</i>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.jtitle=European+Central+Bank&rft.atitle=ECB%2C+Supervision+Newsletter+-+Room+for+improving+valuation+risk+management%2C+May+2021&rft.date=2021-05-19&rft.aulast=Bank&rft.aufirst=European+Central&rft_id=https%3A%2F%2Fwww.bankingsupervision.europa.eu%2Fpress%2Fpublications%2Fnewsletter%2F2021%2Fhtml%2Fssm.nl210519_5.en.html&rfr_id=info%3Asid%2Fen.wikipedia.org%3ASystemic+risk" class="Z3988"></span></span> </li> </ol></div></div> <div 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risk</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Consumer_credit_risk" title="Consumer credit risk">Consumer credit risk</a></li> <li><a href="/wiki/Sovereign_credit_risk" title="Sovereign credit risk">Sovereign credit risk</a></li> <li><a href="/wiki/Settlement_risk" title="Settlement risk">Settlement risk</a></li> <li><a href="/wiki/Default_(finance)" title="Default (finance)">Default risk</a></li> <li><a href="/wiki/Concentration_risk" title="Concentration risk">Concentration risk</a></li> <li><a href="/wiki/Credit_derivative" title="Credit derivative">Credit derivative</a></li> <li><a href="/wiki/Securitization" title="Securitization">Securitization</a></li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="/wiki/Market_risk" title="Market risk">Market risk</a></th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Commodity_risk" title="Commodity risk">Commodity risk</a> (e.g. <a href="/wiki/Volume_risk" title="Volume risk">Volume risk</a>, <a href="/wiki/Basis_risk" title="Basis risk">Basis risk</a>, <a href="/wiki/Shape_risk" title="Shape risk">Shape risk</a>, <a href="/wiki/Holding_period_risk" title="Holding period risk">Holding period risk</a>, <a href="/wiki/Price_area_risk" class="mw-redirect" title="Price area risk">Price area risk</a>)</li> <li><a href="/wiki/Equity_risk" title="Equity risk">Equity risk</a></li> <li><a href="/wiki/Valuation_risk" title="Valuation risk">Valuation risk</a></li> <li><a href="/wiki/Foreign_exchange_risk" title="Foreign exchange risk">FX risk</a></li> <li><a href="/wiki/Margining_risk" title="Margining risk">Margining risk</a></li> <li><a href="/wiki/Interest_rate_risk" title="Interest rate risk">Interest rate risk</a></li> <li><a href="/wiki/Inflation_risk" class="mw-redirect" title="Inflation risk">Inflation risk</a></li> <li><a href="/wiki/Volatility_risk" title="Volatility risk">Volatility risk</a></li> <li><a href="/wiki/Liquidity_risk" title="Liquidity risk">Liquidity risk</a> (e.g. <a href="/wiki/Refinancing_risk" title="Refinancing risk">Refinancing risk</a>, <a href="/wiki/Deposit_risk" title="Deposit risk">Deposit risk</a>)</li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="/wiki/Operational_risk" title="Operational risk">Operational risk</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Operational_risk_management" title="Operational risk management">Operational risk management</a></li> <li><a href="/wiki/Business_risk" class="mw-redirect" title="Business risk">Business risk</a></li> <li><a href="/wiki/Model_risk" title="Model risk">Model risk</a></li> <li><a href="/wiki/Reputational_risk" class="mw-redirect" title="Reputational risk">Reputational risk</a></li> <li><a href="/wiki/Country_risk" title="Country risk">Country risk</a></li> <li><a href="/wiki/Political_risk" title="Political risk">Political risk</a></li> <li><a href="/wiki/Legal_risk" title="Legal risk">Legal risk</a></li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Other</th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Execution_risk" class="mw-redirect" title="Execution risk">Execution risk</a></li> <li><a href="/wiki/Profit_risk" title="Profit risk">Profit risk</a></li> <li><a class="mw-selflink selflink">Systemic risk</a></li> <li><a href="/wiki/Non-financial_risk" title="Non-financial risk">Non-financial risk</a></li></ul> </div></td></tr></tbody></table><div></div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="/wiki/Financial_risk_modeling" title="Financial risk modeling">Modeling</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Arbitrage_pricing_theory" title="Arbitrage pricing theory">Arbitrage pricing theory</a></li> <li><a href="/wiki/Black%E2%80%93Scholes_model" title="Black–Scholes model">Black–Scholes model</a></li> <li><a href="/wiki/Replicating_portfolio" title="Replicating portfolio">Replicating portfolio</a></li> <li><a href="/wiki/Cashflow_matching" title="Cashflow matching">Cash flow matching</a></li> <li><a href="/wiki/Expected_shortfall" title="Expected shortfall">Conditional Value-at-Risk (CVaR)</a></li> <li><a href="/wiki/Copula_(probability_theory)" class="mw-redirect" title="Copula (probability theory)">Copula</a></li> <li><a href="/wiki/Drawdown_(economics)" title="Drawdown (economics)">Drawdown</a></li> <li><a href="/wiki/First-hitting-time_model" title="First-hitting-time model">First-hitting-time model</a></li> <li><a href="/wiki/Immunization_(finance)" title="Immunization (finance)">Interest rate immunization</a></li> <li><a href="/wiki/Market_portfolio" title="Market portfolio">Market portfolio</a></li> <li><a href="/wiki/Modern_portfolio_theory" title="Modern portfolio theory">Modern portfolio theory</a></li> <li><a href="/wiki/Omega_ratio" title="Omega ratio">Omega ratio</a></li> <li><a href="/wiki/Risk-adjusted_return_on_capital" title="Risk-adjusted return on capital">RAROC</a></li> <li><a href="/wiki/Risk-free_interest_rate" class="mw-redirect" title="Risk-free interest rate">Risk-free rate</a></li> <li><a href="/wiki/Risk_parity" title="Risk parity">Risk parity</a></li> <li><a href="/wiki/Sharpe_ratio" title="Sharpe ratio">Sharpe ratio</a></li> <li><a href="/wiki/Sortino_ratio" title="Sortino ratio">Sortino ratio</a></li> <li><a href="/wiki/Survival_analysis" title="Survival analysis">Survival analysis</a> (<a href="/wiki/Proportional_hazards_model" title="Proportional hazards model">Proportional hazards model</a>)</li> <li><a href="/wiki/Tracking_error" title="Tracking error">Tracking error</a></li> <li><a href="/wiki/Value_at_risk" title="Value at risk">Value-at-Risk (VaR)</a> and extensions (<a href="/wiki/Profit_at_risk" title="Profit at risk">Profit at risk</a>, <a href="/wiki/Margin_at_risk" title="Margin at risk">Margin at risk</a>, <a href="/wiki/Liquidity_at_risk" title="Liquidity at risk">Liquidity at risk</a>, <a href="/wiki/Cash_flow_at_risk" class="mw-redirect" title="Cash flow at risk">Cash flow at risk</a>, <a href="/wiki/Earnings_at_risk" title="Earnings at risk">Earnings at risk</a>)</li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Basic concepts</th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Asset_allocation" title="Asset allocation">Asset allocation</a></li> <li><a href="/wiki/Asset_and_liability_management" title="Asset and liability management">Asset and liability management</a></li> <li><a href="/wiki/Asset_pricing" title="Asset pricing">Asset pricing</a></li> <li><a href="/wiki/Bad_debt" title="Bad debt">Bad debt</a></li> <li><a href="/wiki/Capital_asset" title="Capital asset">Capital asset</a></li> <li><a href="/wiki/Capital_structure" title="Capital structure">Capital structure</a></li> <li><a href="/wiki/Corporate_finance" title="Corporate finance">Corporate finance</a></li> <li><a href="/wiki/Cost_of_capital" title="Cost of capital">Cost of capital</a></li> <li><a href="/wiki/Diversification_(finance)" title="Diversification (finance)">Diversification</a></li> <li><a href="/wiki/Economic_bubble" title="Economic bubble">Economic bubble</a></li> <li><a href="/wiki/Enterprise_value" title="Enterprise value">Enterprise value</a></li> <li><a href="/wiki/Environmental,_social,_and_governance" title="Environmental, social, and governance">ESG</a></li> <li><a href="/wiki/Exchange_traded_fund" class="mw-redirect" title="Exchange traded fund">Exchange traded fund</a></li> <li><a href="/wiki/Expected_return" title="Expected return">Expected return</a></li> <li><a href="/wiki/Finance" title="Finance">Financial</a> <ul><li><a href="/wiki/Financial_adviser" title="Financial adviser">adviser</a></li> <li><a href="/wiki/Financial_analysis" title="Financial analysis">analysis</a></li> <li><a href="/wiki/Financial_analyst" title="Financial analyst">analyst</a></li> <li><a href="/wiki/Financial_asset" title="Financial asset">asset</a></li> <li><a href="/wiki/Financial_betting" title="Financial betting">betting</a></li> <li><a href="/wiki/Financial_crime" title="Financial crime">crime</a></li> <li><a href="/wiki/Financial_engineering" title="Financial engineering">engineering</a></li> <li><a href="/wiki/Financial_law" title="Financial law">law</a></li> <li><a href="/wiki/Financial_risk" title="Financial 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