A Systematic Review Of Financial Risk Management Strategies

Abstract

The role of financial risk management is critical to the stability and growth of any organizations, while the dynamic nature of financial risks and the rapid growth of risk management techniques pose persistent challenges. The current study investigates the best approaches for managing financial risks, examining some of the limitations of traditional approaches while also examining the opportunities offered by new technologies. The value of the study comes from its contributions to organizational resilience, the ability to manage risk-return trade-offs, as well as for informing regulatory frameworks in an increasingly risk-aligned financial environment. This systematic review's major aim was a systematic review of the effectiveness of traditional finance risk management techniques and modern techniques, as well as their relevance in various industries, and their gaps. It also aimed to identify actionable steps for businesses and politicians to improve financial risk management practices. The researchers conducted a comprehensive search of several academic databases, including Scopus, Web of Science, and Google Scholar, to find studies published between 2000 and 2023. The search terms were quite broad such as "financial risk management," "risk mitigation strategies" and "AI-based tools." Based on the search, the final analysis consisted of 85 studies. The data were extracted and analyzed after adhering to thematic analysis and PRISMA guidance. The findings suggest that while traditional approaches, including hedging and diversifying, are relevant in a stable financial environment, they are not sufficient to manage more complex risks from a stable standpoint. The more modern tools, including financial derivatives and AI-based technologies, are more flexible to execute as needed with AI-base credit risk models decreasing non-performing loans by 20%, for example. There still remains problem related to the costs, regulatory issues, and cybersecurity. The study also highlighted gaps in the literature, including the need to focus more on long-term evaluations of AI tools and also more context specific strategies for emerging markets. In conclusion, this research highlights the importance of integrating both traditional and modern risk management strategies to effectively tackle diverse financial risks, advocating for standardized frameworks, technological innovation, and ESG integration to build organizational resilience.