What is "systematic risk"?

Systemic risk refers to market risk, which refers to the impact of overall political, economic, social and other environmental factors on the price of securities. Systemic risks include policy risks, cyclical economic fluctuations, interest rate risks, purchasing power risks, and exchange rate risks. The identification of systematic risks is a judgment of the macroeconomic conditions of a country for a certain period of time. It refers to the general negative impact on the entire stock market or the vast majority of stocks. Generally include factors such as economics and overall relationships. For example, there is a serious crisis in the world economy or a country’s economy, rising inflation, and large natural disasters. The consequences of the overall risk are universal. The main characteristic is that all stocks are falling and it is impossible to preserve other stocks by value preservation. In this case, investors have to suffer a lot of losses, many of whom must try their best to throw out the stock. The stock market crash that took place in 1929 was a product of systemic risk.

The impact of economic cycle fluctuations and other factors in systemic risk on the stock market is extremely serious, and any stock cannot escape its attack. The risk assumed by each stock market investor is basically equal. The probability of this overall risk occurring is small. Thanks to the progress of human society, the improvement of natural and social control capabilities, the prevention of overall risk occurrence, and the comprehensive treatment methods that followed it have been greatly enhanced.

Basic Features

Systemic risk is characterized by a general negative impact on the entire stock market or the vast majority of stocks. The consequences of systemic risks are universal. Their main feature is that almost all stocks have fallen, and investors often suffer great losses. It is precisely because this risk cannot be offset or eliminated by diversification of investment, it is also called non-dispersible risk.

Basic classification

Systemic risks are mainly caused by macro factors such as political, economic and social environment, including policy risks, interest rate risks, purchasing power risks and market risks.

Policy risk

Changes in the government’s economic policies and management measures can affect changes in corporate profits and investment income; changes in securities trading policies can directly affect the price of securities. And some seemingly unrelated policy changes, such as the policy of private home purchases, may also affect the supply and demand of funds in the securities market. Therefore, the introduction or adjustment of economic policies and regulations will have a certain impact on the securities market. If this effect is greater, it will cause greater fluctuations in the market as a whole.

Interest Rate Risk

Changes in market prices are subject to the level of market interest rates at any time. In general, when the market interest rate rises, it will have a certain impact on the supply and demand of stock market funds.

Purchasing power risk

As prices rise, the same amount of money may not be able to buy the same goods in the past. This change in the price of goods leads to the uncertainty of the actual purchasing power of funds, known as purchasing power risk, or inflation risk. In the stock market, since the return on investment securities is paid in the form of currency, during the inflation period, the purchasing power of the currency declines, that is, the actual income of investment declines, and there is also the possibility of losses to investors.

Market risk

Market risk is the most common and most common risk in securities investment activities and is directly caused by fluctuations in the price of securities. When the overall market value is overestimated, the market risk will increase. For investors, systematic risks cannot be eliminated. Investors cannot prevent themselves through diversified portfolios, but they can reduce the impact of systemic risks by controlling the proportion of funds invested.

Precautions

For the prevention of systemic risks, it is necessary to pay attention to the following aspects:

Improve alertness to systemic risks

When the overall market has seen a large increase, the volume of sales has repeatedly hit the amount of days, and the stock market has made a lot of money.

And, the market is very popular, and investors are aggressively entering the market. When investors gradually become indifferent to risk awareness, they are often signs of systemic risks. From the analysis of investment value, when the overall market value has an overestimation trend, investors must not relax their vigilance on systemic risks.

Pay attention to control the proportion of capital investment

There are always uncertain factors in the operation of the stock market, and investors can adjust the proportion of capital investment according to the stage of market development. Since the current stock market has seen a large increase, from the perspective of effective risk control, investors should not adopt heavy load operations, and full-entry full-fill operations are more outdated. During this period, the proportion of capital investment needed to be controlled within the range of acceptable risks. Investors with heavier positions may selectively dish out some stocks, reduce their position, or use part of the investment funds for relatively safe investments, such as the purchase of new shares.

Prepare for stop-loss or stop-loss

Investors cannot predict when there will be systemic risks, especially during periods when prices are rising rapidly. If you sell your shares ahead of time, it often means that investors cannot enjoy the “crazy” pull-ups. At this time, investors can continue to hold shares under the premise of controlling the position, but they are ready to stop or stop at any time. Once the market appears systemic risk, investors can sell in a decisive manner to prevent further loss. expand.

Systematic Risk and Economic Virtualization Systematic Risk

"Systemic risk" refers to the possibility that an event can cause a series of consecutive losses in a system of institutions and markets. Risk spillovers and infections are the most typical features of systemic risk, and another important feature is the asymmetry of risks and benefits. Compared with the management of individual risks, the supervision of systemic risks is more difficult, more complicated, and requires some fundamental changes in the concept of supervision and supervision.

An important feature of the development of the global economy and the financial system is that the development speed and scale of the virtual economy are far greater than the real economy. In the relationship between the virtual economy and the real economy, the past research in the domestic and foreign academic circles has attached great importance to the development of the virtual economy and deviated more from the development of the real economy (such as the transaction volume of the international currency market is much larger than the scale of international trade), and some economies The scholars even believe that this kind of "inverted pyramid" type of economic and financial system may collapse. However, in people's research, more emphasis is placed on the aspects of the virtual economy and the real economy, especially the relationship between the liberalization of the international financial market and the economic performance of industrialized countries.

Virtual economic benefits

On the one hand, the development of the virtual economy has indeed brought benefits to the real economy, such as the establishment and development of international currency markets and the related

Inflow creates unprecedented real purchasing power. Taking the United States as an example, the contribution of the financial, insurance and real estate sectors to U.S. GDP is far greater than that of manufacturing; on the other hand, since 1970, when financial innovation and financial market liberalization have flourished, At the same time, the world-wide economic growth rate began to decline. The rate of output growth of the major industrialized countries in the 1990s fell to about two-thirds of that in the 1960s, and the average growth rate of the developing countries also fell at roughly the same rate.

It is difficult to define a very clear systemic risk. In the existing literature, it is generally believed that “systematic” on the one hand refers to an event that affects the function of the entire system; on the other hand, it refers to an event that makes an irrelevant third party also bear a certain cost, “systematic risk”. It refers to the possibility that an event can cause a series of consecutive losses in a system of institutions and markets (George G. Kaufman). Therefore, systemic risk is an “externality” and it is the cost that a single company (institution) imposes on the society as a whole above its actual value. Risk overflow and infection are the most typical characteristics of systemic risk, and This feature of systematic risk is not limited to the economic and financial fields of a country. Especially since the 1980s, the trend of global economic integration and financial globalization has made the economies of various countries vulnerable to changes in the international economic environment; the linkage of prices in the stock market and foreign exchange markets has led to a chain reaction of financial systemic risks. Accelerate; the high-tech level of modern communications technology and financial transactions also creates conditions for the dissemination of information and the spillover of risks. The turbulent outcomes of a certain market will quickly spread through the computer network system, affecting the economic and financial situation in other parts of the world. .

Asymmetry of risks and benefits

Another important feature of systemic risk is the asymmetry of risk and return. This is also one of the important reasons why systemic risk often damages the real economy.

The existence of systematic risks may make completely free market mechanisms threaten the overall development of finance and economy. This defect, which compensates for a completely free market mechanism, relies mainly on strong regulatory authorities. It is the responsibility of financial regulators to force the micro agent to take systemic risks into account; the more stringent the risk management of regulatory authorities, the higher the cost of the private sector, and the more internalized the systemic risk externalities. In order to ensure that individual investment decision makers not only consider the risks faced by their individual, but also take into account the risks faced by the society as a whole, regulators may add additional conditions. For example, the regulatory authority may require that the capital adequacy ratio of the banking sector and other financial institutions reach a certain standard (ie, require their liquid capital to hold a specific ratio of all assets). This kind of liquidity capital holds for these financial institutions. It means that some potential income-generating investment activities must be abandoned. This is a kind of cost, and regulators hope to resist the impact of the financial crisis; regulators may also try to directly impose some restrictions on the actions of investors. For example, by charging certain fees for short-term capital flows, the private sector is forced to take into account its costs and the social costs that short-term capital flows may have for a country’s economy; in some cases, regulators may even be able to Capital flows are directly controlled.

Regulatory defects

Compared with the management of individual risks, the supervision of systemic risks is more difficult, more complicated, and requires some fundamental changes in the concept of supervision and supervision. The reasons for systemic risk management difficulties first manifest themselves in the difficulty of estimating systemic risks. The supervisor's work must include prohibiting certain risks from turning into systemic risks, acting as a “guard” between the two risks, and in order to prevent the financial panic caused by the loss of market confidence, the central bank fulfills the final lender’s position by injecting liquidity funds. The responsibility is very important.

However, in many cases, when individual financial institutions are in trouble, it may not be easy for the central bank to find suitable channels to inject liquidity.

Gold, which can not properly perform the duties of the final lender, is another difficulty in systemic risk supervision. Especially when there is a problem with off-exchange trading of financial derivatives, the central bank may not be able to use its own resources to inject funds to provide assistance. Therefore, it is necessary for the supervision authority to provide assistance by organizing the private sector to inject funds to avoid and mitigate the losses caused by systemic risks.

There is another flaw in the system of final lenders for systematic risk supervision and similar deposit insurance systems. When supervisors try to deal with systemic risks, they often have to provide financial support, so moral hazard inevitably arises. problem. Systematic risk is not the sum of simple private risks, but is greater than the sum of private risks. Similarly, the sum of risks of private management is less than the total risk of the financial industry, because, as mentioned earlier, private individuals are only avoiding risks and cannot eliminate risks. The purpose of the final lender, deposit insurance system, etc. is to control such social risks, but the final lender, deposit insurance system, etc., to some extent, only shift the risk from the private sector to the public sector, and transfer part of the systemic risk to Moral Hazard. Therefore, effective supervision should distinguish the circumstances of the provision of lender of last resort and punitive interest on the object of assistance; systems such as deposit insurance should not provide assistance to financial institutions or individual speculators, but only to households suffering losses from non- speculative investment. Provide assistance.

In the past, one of the main regulatory measures to deal with systemic risks was to divide the financial markets clearly and separate them from each other. For example, the Glass-Steagall Law established a “firewall” between commercial banks and other financial services industries. , prohibiting mixed operations. However, since the 1990s, due to the influence of market liberalization, the distinction between banks and other financial institutions has become increasingly blurred, and the degree of globalization and integration of financial markets has deepened, making it a matter for countries Also internationally, all divided parts are now closely interdependent. In particular, in the modern financial market, a prominent feature is that financial innovation activities have become more and more active. Events that have never occurred before or have never been foreseen have also occurred. It is often the case that the new event has caused the greatest risk. This has led to further challenges in the supervision of financial systemic risks and concepts. Traditionally, it has supervised commercial banks, investment banks, insurance companies and other financial institutions, such as the deployment of funds among different types of financial institutions as in 1987. The actions to stabilize fluctuations are becoming more and more difficult and inefficient. Here, what people want to emphasize in particular is that regulators must have some flexibility. They must be based on the principle of risk management and not on a pre-defined regulatory framework. The fundamental reason is that the financial system, which is the core of the modern economic system, is no longer a simple service system but a system that comprehensively considers risk management and self-development. Therefore, supervision cannot be limited to the management of financial services and functions, but should adhere to the principle of risk management. At the same time, regulators must adhere to flexibility based on market changes and respond quickly to changes in the market because any conventional rules and rules based on certain products cannot adapt to changing financial markets. (

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