This website uses cookies to ensure you have the best experience. Learn more

Investigating Systematic And Idiosyncratic Risks In Money, Banking And Financial Markets

1219 words - 5 pages

Risks, the Effects and Affected
Rose Smith
Montclair State University
April 13, 2014
Author Note
This paper was prepared for Economics 301, Section 01, taught by Professor Ramjerdi

Risks, the Effects and Affected
At some point in our lives, we have all experience some form of risk either a systematic or idiosyncratic risks. According to authors, Stephen G. Cecchetti and Kermit L. Schoenholt’z book, Money, Banking, Financial Markets, “Risk is everywhere. It comes in many forms and from almost everywhere imaginable place. All risks can be classified into one of two groups: (1) those affecting a small number of people but no one else (unique or idiosyncratic risks) and (2) those affecting everyone (systematic or economy wide risks) (ch.5 p.110).” The main point of this paper is to investigate systematic and idiosyncratic risks, what causes each to occur and how they can be eliminated if possible.
What are Risks?
A systematic risk or economy wide risks is believe to be the worst of the types of risks because it cannot be avoided and it can also be very detrimental to governments, firms and households making it much harder to recover from the losses. There are also “macroeconomic factors, such as swings in consumer and business confidence brought on by global economics conditions or changes in the political climate. For History tells us that when oil prices rise, auto sales fall, and the automobile industry suffers (ch.5 p.111).” Another famous example of an economy wide risks is the Housing Bubble Crisis. In 2008, the economy experience a recession that left behind in its wake thousands of people having their homes foreclosed and homeless. Many people also lost their jobs and lifesavings due to businesses losing profits sending the unemployment rate to 10 percent. Some companies could not sustain the downturn of the economy like the Lehman Brothers. Forbes’s magazine author Steve Schaefer’s article, The Great Recession’s Biggest Bankruptcies: Where Are They Now? Offered some insight by describing the Lehman Brothers disaster as “the largest corporate bankruptcy in United States history, their valuable assets were sold off in a chapter 11 bankruptcy and the rotting carcass was left to be disposed of by a trustee.” Lehman Brothers had an overwhelming debt totaling $619 billion dollars. This systematic risk was unavoidable due to the subprime mortgage crisis as a result it had a domino effect which spread like wildfire to other financial institutions domestic and international like The Bank of New York Mellon and the Bank of Japan which had either lend money to or invested in Lehman Brothers. Companies saw their stocks declined rapidly because Lehman Brothers’ chapter 11 bankruptcy case.
Idiosyncratic risks are less extreme than systematic risks. “Idiosyncratic risks comes in two types. First, one set of firms is affected in one way and other firms in another way. An example would be a change in the price of oil (ch.5 p.111).” This...

Find Another Essay On Investigating Systematic and Idiosyncratic Risks in Money, Banking and Financial Markets

FInancial and Banking Systems Essay

1237 words - 5 pages 3.2 Financial system 3.2.1 Banking system Financial liberalization in Vietnam have speed up from the early of the 1990-s, the banking system in Vietnam particularly and the financial system in generally has achieved a lot of progress. These twenty years of progress have proved that, the banking system has been transferring from a one-tier system into a two-tier system which allowed all households to compete fairly and effectively. In 1990 two

History of Money and Banking Essay

3112 words - 12 pages government and the free market working together to get things done. Many questions should be asked such as: what is the history of money and banking in the United States? What has proven sustainable monetary policy and how all this either helped or harmed by government involvement? These are important questions on the future of the United States. In the words of John Maynard Keynes, “The ideas of economist both when they are right and when they are

Money, Banking and Global Finance

1140 words - 5 pages financial supervision and regulation, and oversight of the functioning of the payments system. Direct provision of payment services may support these functions in some respects, but it also creates potential difficulties with them in others. Governance structure is an example. However, as the U.S. banking industry has become more integrated nationwide, an integrated governance structure for the provision of Federal Reserve payment services has become

Capital Markets and Investment Banking Process Paper

1306 words - 5 pages which has a result of displaying natural risks. Bonds: Fixed earnings protection distribute through private-sectors businesses for raising money towards continual function expenses. Bonds are also distributed within the governments. Bonds are choice in various manners, including the bond kind, coupon, general interest rate environment, maturity of the bond, and rating. Funds: The funds are intended for availability within a wide range of asset

Capital Markets and Investment Banking Process

1663 words - 7 pages PAGE Investment Banking PAGE 1 Capital Markets and Investment Banking ProcessAugust 7, 2006An investment is the current commitment of money or other resources in the expectation of reaping future benefits. The time committed to reading the textbooks is an investment. I may or may not benefit from the readings so I am investing my time. I could very well be wasting my time if I do not study and do well with this course. The cost of about $1500

Money, the Federal Reserve System, and Banking

722 words - 3 pages Money, the Federal Reserve System, and Banking You have used money to measure the price, the size of business, total output in the economy, and income. Coins and paper money are called currency. People use currency daily. When you go to a movie, you probably buy a ticket with currency. Coins and paper money work well for small purchases and when payment is made directly from one person to another. But, for large purchases or when


1472 words - 6 pages There is a need for high level of consultation, co-ordination and co-operation in every organization or business. To this effect, managers all over the world are often faced with the dilemma of effectively deploying human, material, technological, natural and financial resources to achieve desired organizational goals and objectives. The collapse of the financial markets, touching off reverberations in the real economy in the last months of

Financial performance of Islamic banking and conventional banking in United Kingdom- A Comparative Study

1423 words - 6 pages Chapter 1: Introduction 1.1-Introduction to Chapter: This chapter describes the brief introduction about research title, research aims, research objectives, research hypothesis, research context and research limitation used in this research. 1.2-Research Title: Financial performance of Islamic banking and conventional banking in United Kingdom- A Comparative Study. 1.3-Research Aim: The Aim of this research is to analysed and evaluate

Financial risks in banks

2012 words - 9 pages private information in its own. • Reputational risks Majority of the clients will not be happy when their information was lost. It gives to the bank risk to lose its own reputation. Reputation is one of the main parts of the bank. Without reputation bank will not be able to survive in the competitive world. If the bank lost his own reputation clients are not going to work with him. They are does not believe to him and never put money securities

Discuss the primary purpose of financial markets in respect to financial instruments and institutions

554 words - 2 pages always be enough money, people are encouraged to save by providing low interest rates that reward the customer. In the same respect, those that borrow money must pay interest to cover the expenses of the bank's intermediation in borrowing and lending as well as the interest that is paid to the surplus unit.The bank's intermediation also allows the spread of risk over many borrowers and many lenders.So far we have seen how financial markets use

U.S. Money and Banking: Key Issue Facing Us in 2014, Regulating our Banks

841 words - 4 pages realize its true strength. Works Cited Fontinelle, A. (2014). What is the Dodd-Frank Act? How does it affect me? Investopedia. Retrieved from Ritter, L., Silber, W., Udell, G. (2009). Money, Banking & Financial Markets (12th ed.). Boston: Pearson Education. Salsman, R. (2012). Five Financial Reforms That Would Prevent Crises and Promote Prosperity. Forbes. Retrieved from:

Similar Essays

Lessons Learned In Money And Banking

1514 words - 6 pages Economic uncertainty has caused exaggerated criticism of the Federal Reserve. Money and Banking has deepened my understanding of the Federal Reserve and has helped me challenge those criticisms. The U.S. standard of living would drop if people lost faith in the safety of financial institutions. Frederic Mishkin makes the point in the text, The Economics of Money Banking, and Financial Markets (2010) that “Banks and other financial

Banking, Money And Finance Essay

2244 words - 9 pages The article is discussing of bank deposits and loans in the monetary transmission mechanism. It would lead the financial system to achieve monetary stability and creation of sound financial structure. The monetary policy implemented by bank can influence the real economy through monetary transmission mechanism such as money channel and credit channel. For example, in the short run, bank may sell off their securities holdings to deal with

Banking, Money And Finance Essay

1896 words - 8 pages of Economics and Administration, University of Malaya ‘Banking Sector Stability and Financial Liberalization: Some Evidence From Malaysia’ [ONLINE] available at [Accessed 5 May 2014] 5 Coricelli, F, Égert, B. and MacDonald, R. (2006) The William Davidson Institute, University of Michigan. ‘Monetary Transmission Mechanism in Central & Eastern Europe: Gliding on a Wind of Change’ [ONLINE] available at http

Money And Banking Essay

2331 words - 10 pages ,, these numbers had changed to $625 billion in subprime loans back by $500 billion in bonds. Further making the situation worst was the creation of financial instruments in the form of credit default swaps. By 2006,, the credit default swaps on mortgages bonds was eight times more than the values of the bonds. Therefore, when the crisis hit it wiped out the value of the bonds and investors lost their money. The United States was not the only