Review of Causes, Prediction, and Prevention of Systemic Risk

Abstract

In financial market, people always ignore or underestimate the potential risk of systemic risk until black swan events emerged as an irretrievable crisis. In order to analyze and prevent from crisis that generated by systemic risk, this paper collates and presents detailed review of the causes, prediction, and mitigation of systemic risk by gathering and sifting current theoretical and empirical research. It explores the complexity and interdependence of financial systems and emphasizes how systemic risk is created via endogenous risk generation via the investment decisions of financial institutions and regulatory and market failures. Moreover, it underlines the strong demand of through legislative changes, the importance of enhanced market discipline, and well-crafted government interventions. Deliberative risk governance is presented as a practical and necessary strategy when it comes to addressing stakeholders in the risk management process to achieve legitimacy and consensus. The research ends by advocating for a comprehensive strategy for risk management to strengthen the resilience of the global financial system and reduce the probability of future potential crisis.