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Quantitative Finance and Economics

2026, Volume 10, Issue 2: 302-325. doi: 10.3934/QFE.2026013
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Research article

How does the use of derivatives affect bank default risk, performance, and value? An examination of European and MENA countries

  • Department of Financial Economics and Accounting, Universidade de Santiago de Compostela, Santiago de Compostela, 15782, Spain
  • Published: 18 May 2026

  • JEL Codes: G14, G15, G21

  • In this paper, we examined the impact of derivatives on the default risk, financial performance, and firm value of banks operating in the Europe, Middle East, and Africa (EMEA) region. The analysis was based on a balanced panel dataset comprising 189 banks (94 from Europe and 95 from the Middle East and Africa) covering the period 2011–2016. Our major findings revealed that the total notional derivatives position has a positive effect on risk mitigation, which is more pronounced in the case of hedging activities than in trading activities. Conversely, the overall use of derivatives does not exhibit a statistically significant relationship with financial performance as measured by accounting-based indicators. However, the market appears to assign a valuation premium to banks that use derivatives for hedging purposes, while banks with larger trading exposures experience a negative valuation effect. Finally, we found that the influence of total derivatives on performance and risk reduction varies significantly between European banks and those in the Middle East and Africa.

    Citation: Luis Otero, Darine Marouf, Pablo Durán, Luis-Ignacio Rodríguez. How does the use of derivatives affect bank default risk, performance, and value? An examination of European and MENA countries[J]. Quantitative Finance and Economics, 2026, 10(2): 302-325. doi: 10.3934/QFE.2026013

    Related Papers:

  • In this paper, we examined the impact of derivatives on the default risk, financial performance, and firm value of banks operating in the Europe, Middle East, and Africa (EMEA) region. The analysis was based on a balanced panel dataset comprising 189 banks (94 from Europe and 95 from the Middle East and Africa) covering the period 2011–2016. Our major findings revealed that the total notional derivatives position has a positive effect on risk mitigation, which is more pronounced in the case of hedging activities than in trading activities. Conversely, the overall use of derivatives does not exhibit a statistically significant relationship with financial performance as measured by accounting-based indicators. However, the market appears to assign a valuation premium to banks that use derivatives for hedging purposes, while banks with larger trading exposures experience a negative valuation effect. Finally, we found that the influence of total derivatives on performance and risk reduction varies significantly between European banks and those in the Middle East and Africa.



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