Study Document
Economic Crisis Was Born, Ultimately, Thesis
Pages:2 (638 words)
Sources:2
Subject:Theories
Topic:Economic Theory
Document Type:Thesis
Document:#19603660
Subprime mortgages were not by any means a major component of the total market, yet when they crashed, the high degree of market interdependency led to sharp declines in the value of many companies, not just banks that happened to be burdened with toxic assets. The methodology will therefore begin by comparing the interdependence of different markets over time. This will reveal whether or not sectors and global markets have become increasingly correlated over time. It is hypothesized that they have, which in turn has contributed to an increase in systemic risk as such interdependence reduces the value of diversification.
The second component of the paper will examine what is being done with respect to reducing systemic risk. This component will include an overview of the traditional theory and a review of the current literature on systemic risk. The crisis has spurred new work on systemic risk, including work specific to financial institutions. Huang, Zhou and Zhu (2009) have developed a framework, for example, to analyze systemic risk at financial institutions. Such methods may provide insight for regulators, boards of directors and regulators that will allow them to curtail risk before it manifests into full-blown economic crisis.
These two components address systemic risk on a total global market level and on the firm-specific level. The crisis, give or take a real estate bubble, began in the banking system so it important to understand the dynamics of systemic risk in financial institutions, but it is also important to understand how trouble in one industry can spread so quickly around the world, affecting seemingly unrelated businesses and nations. Ultimately, this paper will serve to provide better understanding of those linkages.
References:
Weisman, J. & Paletta, D. (2009). Summers says more regulators could join Fed to police risk. Wall Street Journal. Vol. 254, 62, A3.
Huang, X; Zhou, H. & Zhu, H. (2009). A framework for assessing the systemic risk of…
Sample Source(s) Used
References:
Weisman, J. & Paletta, D. (2009). Summers says more regulators could join Fed to police risk. Wall Street Journal. Vol. 254, 62, A3.
Huang, X; Zhou, H. & Zhu, H. (2009). A framework for assessing the systemic risk of major financial institutions. Journal of Banking and Finance. Vol. 33, 11, 2036-2049.
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