Abstract:

Abstract The aim of this study was to investigate the relationship between the derivative assets in the portfolios of banks and the risk and profitability performance of the sector, using the data of the G-7 countries over the period 2010: Q1- 2021: Q4. For this purpose, the Pedroni and Kao cointegration test, Fully Modified Ordinary Least Squares (FMOLS), fixed effect panel regression model, and Dumitrescu-Hurlin (D-H) panel causality test were performed in the analysis of the variables. According to the analysis results, the increase in the return on assets and net interest margin, which were used as a profitability indicator, negatively affected the derivative assets in the banks’ portfolio, whereas the increase in the return on equity positively affected the derivative assets. Besides, increases in the capital adequacy and non-performing loans ratios, which were used as risk indicators, positively affected the derivative assets in the portfolio of banks. According to the causality test results, a bilateral causality existed between derivative assets, return on assets and return on equity, whereas a unilateral causality existed with capital adequacy and non-performing loans ratios. Moreover, no causal relationship was detected between derivative assets and net interest margin.

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