Event Risk explained...

In Topic 11 of the book I introduced the concept of risk and also looked at the role of hedge funds. In Article 25 I focused on the impact of the various forms of currency risk on corporate profitability. In this latest blog I would like to explain another form of risk that can impact on the price of shares and bonds. This is called event risk and we can define this as the risk that some unanticipated event results in a sharp fall in the value of a financial market security. A good example was the September 11th terrorist attacks where the hijacked airliners crashed into the World Trade Center and Washington's Pentagon causing multiple deaths and widespread destruction. This event impacted on many types of businesses including the Airlines who saw a short-term shutdown in their operations and longer-term decline in passenger numbers. As a result we saw sharp falls in the share prices of all the major Airlines with a number of carriers having to file for bankruptcy. Indeed the demise of XL Airways and Zoom in the UK can be traced directly back to this one terrible event which caused unexpected financial distress in an industry that was already vulnerable.