Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets

Abstract

a b s t r a c t a r t i c l e i n f oAvailable online xxxxAn understanding of volatility and co-movements in financial markets is important for portfolio allocation and risk management practices. The current financial crisis caused a shrinkage in values of most assets, an increased volatility and a threat to the survival of several institutional investors. Managing risks and returns within the classic portfolio theory, when correlations across securities soar, is increasingly challenging. In this paper, we investigate the volatility behavior and the co-movements between sukuk and international stock indexes. Symmetric multivariate GARCH models with dynamic conditional correlations (DCC) were estimated under Student-t distribution. We provide evidence of high correlations between sukuk and US and EU stock markets, without finding the well-known flight to quality behavior affecting Islamic bonds. We also show that volatility linkages between sukuk and regional market indexes are higher during financial crisis. We argue that investors could obtain diversification benefits including sukuk in a well-diversified equity portfolio, given their lower volatility compared to equity. But higher volatility linkages and dynamic correlations during financial crises show that they are hybrid instruments between bonds and equity. Our findings are relevant for institutional investors and asset managers that include Islamic bonds in a diversified portfolio.

Applying multivariate-fractionally integrated volatility analysis on emerging market bond portfolios

“…In a similar framework, Kenourgios and Padhi (2012) covered the bond markets of a wide range of EM countries and found the co-integration levels and diversification benefits of EM bonds during wellknown crises, including the late 1990s. By applying DCC-GARCH models, Sclip et al (2016) and Bhuiyan et al (2018) revealed the diversification benefits of sukuks (Islamic bonds) within given samples (see also Goeij 2004, Kenourgios et al 2011, Celik 2012, Christiansen 2010, Benlagha 2014, Bessler et al 2016, and Fang et al 2018.…”

Pengaruh Sistem Perbankan, Makroekonomi, Dinamika Pasar Keuangan terhadap Perkembangan Sukuk Korporasi

“…Tidak seperti obligasi konvensional dengan pembayaran kupon tetap, sukuk sebagai sertifikat yang memberi investor sejumlah pengembalian aset tertentu sehingga sesuai dengan larangan pembayaran bunga Islam (Haron dan Ibrahim, 2012). Adapun prinsip-prinsip syariah pada sukuk adalah melarang adanya pembayaran dan penerimaan bunga (riba), transaksi yang melibatkan ketidakpastian yang berlebihan (gharar) dan perjudian (maysir), yang meliputi spekulasi, short selling dan derivatif keuangan tanpa transaksi barang nyata yang mendasarinya (Maghyereh dan Awartani, 2016;Sclip et. al., 2016;Shahzad et.…”

Harvesting Islamic risk premium with long–short strategies: A time scale decomposition using the wavelet theory

“…They found that sukuk are more exposed to stock market transmissions than bonds. Furthermore, Sclip, Dreassi, Miani, and Paltrinieri (2016) examined the volatility and the comovement behaviour between sukuk and international stock indices. Their volatility linkages and dynamic correlation reveal that sukuk is a hybrid asset between bonds and stocks.…”