Contagion or systemic risk and this is one of the scariest risks this is also one of the things that caused chaos in the world recession and it’s weird it’s almost like everything in finance went wrong and that’s because of systemic risk so systemic risk says that if one part of the machine breaks down the entire thing comes to a halt so what we mean by contagion systemic risk I’ll give you a quick little example imagine a supply chain where you have this person is lending to this person who’s lending to that person thing and let’s say this person over here fails to repay this person here so the this person here defaults this thing causes this person to default which then causes me to have problems why this is seen as systemic risk is because when we looked at or when we did our credit models and all the sub stuff we were looking at this party and we thought no this party’s fine but we didn’t take into consideration this party’s credit risk or this is other risks that are dependent and say other parties that could have even counterparty risk and the risk that this fails and causes them to fail is known as systemic or contagion.

One way to try and get around this is the use of a copula which people do try to do I mean a factory called I think his name is David X he was like no we can use these copiers to model this contagion risk totally stuffed up because again he used a normal distribution instead of one that was more skew and fat-tailed and so the credit rating agencies were like oh look at this maths they didn’t really understand it they accepted it and they were giving things triple-a rating there should not have had triple-a rating because they contained all this containment and systemic risk but it’s a very difficult one to pick up and it sometimes is known also as like the hidden risk or an unknown risk and people freaked out about that.

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