Market Risk
The risk of losses due to broad movements in financial markets, including equity prices, interest rates, currency rates, and commodity prices.
What is Market Risk?
Market risk (also called systematic risk) is the risk of losses resulting from changes in broad market variables that affect all assets: equity prices, interest rates, foreign exchange rates, and commodity prices. Unlike idiosyncratic (company-specific) risk, market risk cannot be eliminated through diversification because it affects all securities simultaneously. The four main categories are equity risk, interest rate risk, currency risk, and commodity risk. Banks and financial institutions measure market risk using Value at Risk (VaR), which estimates the maximum expected loss over a time horizon at a given confidence level. Basel III regulations require banks to hold capital against market risk in their trading books.
Example
In March 2020, the S&P 500 fell 34% in 23 trading days as COVID-19 fears triggered global risk-off selling. A diversified equity portfolio holding hundreds of stocks across multiple sectors lost nearly all its value simultaneously — no amount of diversification within equities protected against this market-wide risk. Only truly uncorrelated assets (government bonds, gold, cash) provided meaningful protection. This illustrates why asset allocation across non-correlated asset classes, not just stock diversification, is the correct response to market risk.
Source: BIS — Market Risk Framework