DEFINING FINANCIAL RISK: A REVIEW OF APPROACHES

Despite numerous researches and publications being focused on financial risk management, by now there is no generally accepted definition of financial risk nor its taxonomy. The aim of this paper is to suggest upon a discussion the definition of financial risk along with its taxonomy. The methodology used in this paper is a method of induction over literature analysis and empirical data quantitative research. The literature and empirical review are placed on the same level as two complementary parts of the research, providing different views to the discussion. A literature review is performed on two research questions asking how authors define financial risk and how they classify its different types. The third research question, answered by empirical review, asks how companies classify financial risk by analysis of financial statements. As a first result, financial risk is defined as a risk of a loss caused by unfavourable change on financial markets as well as poor management of financial assets and liabilities. As a second result, the accepted financial risk taxonomy is determined as follows: interest rate risk, foreign exchange risk, commodity risk, stock risk, credit risk and liquidity risk, while the first four risk classes shall be considered as sub-categories of market risk and the last two classes as results of poor financial management. The results of this paper are intended to open expert discussion on financial risk definition and taxonomy, as well as to build a framework for further research on risk, solvency and liquidity management.