Purpose
This paper aims to reviews Sukuk risk classification schemes based on extending and adapting the risk classification schemes of conventional finance. It is then argued that risk classification schemes based on Sukuk structure provide significant insights into Sukuk risk not obtainable from conventional schemes. This is because Sukuk structure risk classification schemes link Sukuk risk more directly to the fundamental causal factors creating those risks. These links are less evident in conventional risk classification schemes. It is hypothesised that Sukuk structure risk factors will prove to be highly significant in multifactor expected return regressions.
Design/methodology/approach
The paper argues that, given the paucity of the empirical data currently available to researchers in Islamic finance, greater care needs to be taken in hypothesis development than is necessary for conventional finance. The limited data available should be used for testing hypotheses and not “wasted” in hypothesis formation. Through a meta-analysis of the existing literature on Sukuk risk, it is hypothesised that Sukuk structure risks will be highly significant in explaining Sukuk returns and returns volatilities in empirical tests.
Findings
The main Sukuk structures, debt based, equity based, assets based, agency based and hybrid structures, arise directly from the requirement of Sukuk to conform to the Shariah and to the fundamental ethical principles of Islamic finance and business. Further, Sukuk risk profiles are directly related to Sukuk structures. Thus, Sukuk structure risks are essentially Shariah risks. The paper presents a Sukuk risk classification matrix based on an evaluation of Sukuk structure risks.
Research limitations/implications
The findings on the relation of Sukuk risks to Sukuk structures require corroboration by rigorous empirical tests.
Social implications
The paper contributes to work on the creation of evidence-based risk management techniques in Islamic finance and to the expansion of ethical financial management.
Originality/value
The paper is one of the early detailed academic studies on the evaluation of risks arising from Sukuk structures.
This paper re-examines the small firm premium in the UK from December 1987 to December 2004 using a new survivorship bias-free and look-ahead bias-free database of the UK market covering stocks officially listed in the UK during this period. Prior research (Dimson, E., and P.R. Marsh. 1987. The Hoare Govett smaller companies index for the UK. Hoare Govett Limited, January; Dimson, E., and P.R. Marsh. 1999. Murphy's law and market anomalies. Journal of Portfolio Management 25, no. 2: 53-69) documented an annual small-size premium in the UK market of around 6% during the period 1955-1986 and an annual small-size discount of 6% during the years 1989-1997. Our results show a continuation of the small firm premium in the UK during 1988-2004 in excess of 7% per year. We conclude that the reversal of the small firm premium documented by Dimson and Marsh (1999. Murphy's law and market anomalies. Journal of Portfolio Management 25, no. 2: 53-69) is dependent on the data sample and methodology used. The main contribution to the 7%+ geometric annual premium reported here comes mainly during the years 1993 and 1999. Furthermore, exploitation of the small firm premium depends on the strategy used and in particular on the length of the holding period before rolling over the strategy. Thus, while it can be argued that an economically significant small firm anomaly continues to exist, it appears to be sample-dependent, time-varying and unreliable, and difficult to exploit in practice.
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