Risk, idiosyncratic (idiosyncratic risk)

Dangers arising from circumstances in a single company. This risk can be reduced by diversifying investments (the risk that is firm specific and can be diversified through holding a portfolio of shares). – In the context of securitized securities, the risk refers to the originator’s claim against a single borrower – for example, from a mortgage. By placing a class of similar claims in a pool – in the example, all mortgage loans of the originator – this form of risk should be greatly reduced due to the large number of relatively small loan amounts as a rule. – Of course, systematic risk and systemic risk remain. Falling residential property prices and an associated loss of confidence in collateralized debt obligations have shown in the subprime crisis that even well-mixed portfolios can suffer a very sharp decline in value. – Cf. ECB Monthly Bulletin, February 2008, p. 93 (minimizing idiosyncratic risk does not exclude market risk).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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