The connectedness between Sukuk and conventional bond markets and the implications for investors

Abstract

Purpose The purpose of this paper is to examine the connectedness across a variety of Sukuk and conventional bond indices and the implications for optimal asset allocation for the period January 1, 2010–April 30, 2020. Design/methodology/approach The data set consists of five major Sukuk (Dow Jones Sukuk, Thompson Reuters BPA Malaysia Sukuk, Indonesia Government Sukuk, S&P MENA Sukuk and Tadawul Sukuk and Bonds Index) and five conventional bond indexes, one for developed (USA) and four for emerging markets (Malaysia, Indonesia, Africa and Qatar). This study investigates the connectedness and volatility spillover effects across the aforementioned indices, by following the Diebold and Yilmaz (2012) approach, based on the time-varying parameter vector autoregressive (TVP-VAR) model. In addition, this paper provides optimal hedge ratios and portfolio weights for investors. Findings The empirical results show that Sukuk and conventional bond markets are highly integrated and that total connectedness exhibits sensitivity to exogenous shocks. The Dow Jones and the Malaysian Sukuk indices are the primary shock transmitters to other markets. However, the weak volatility spillovers between the Dow Jones and conventional bonds suggest that opportunities for optimal asset allocation may in fact exist. The highest (lowest) hedging effectiveness can be achieved by taking a short position in Malaysian (Qatarian) bonds. Originality/value To the best of the knowledge, this is the largest sample taken into account to investigate the connectedness between Sukuk and conventional bonds.

Can treasury inflation-protected securities safeguard investors from outward risk spillovers? A portfolio hedging strategy through the prism of COVID-19

“…However, during the last month of the sample period, we observe a rise in volatility spillovers from 50 to 57%, reaching their peak, undoubtedly due to the start of the Russia–Ukraine war, along with the concomitant rise in inflation rates due to conflict. These results are aligned with the existing literature reporting that connectedness strengthens during turbulent periods (Umar et al 2020 ; Wen and Wang 2020 ; Balcilar et al 2021 ; Samitas et al 2021 ; Zhang et al 2021 ; Kumar et al 2022 ; Mensi et al 2022 ; Papathanasiou et al 2022c ; Yousaf and Yarovaya 2022 ). More specifically, we find evidence that the impact of COVID-19 on volatility spillovers exceeded the one caused by the European financial crisis, as outlined by Gunay ( 2021 ) and Zhang and Hamori ( 2021 ).…”

“…On the other hand, our findings are contrary to the findings of Liow ( 2015 ) and Liow et al ( 2018 ) who document real estate as a net receiver of volatility spillovers. Dynamic connectedness showed accretion during periods of turmoil, such as the US–China trade war, COVID-19 and the Russia–Ukraine war, indicating that volatility spillovers are prone to extraneous shocks, as cited by the literature (Umar et al 2020 ; Wen and Wang 2020 ; Balcilar et al 2021 ; Samitas et al 2021 ; Zhang et al 2021 ; Kumar et al 2022 ; Mensi et al 2022; Papathanasiou et al 2022c ; Yousaf and Yarovaya 2022 ). Moreover, the empirical results indicate that the short position in the volatility of TIPS is proved to be an efficient hedge for all the sampled assets, with the exception of short-term Treasury bonds, and their hedging ability was enhanced during COVID-19.…”

Sukuk and bond dynamics in relation to exchange rate

“…More recently, results show a high correlation between the Sukuk and traditional bond markets in Malaysia, simultaneously showing that conventional bonds are the transmitter of net surplus. In contrast, the Sukuk market is the primary recipient of net shocks for their sample period (Ahmed and Elsayed, 2019; Samitas et al , 2021).…”

Determining Financial Uncertainty through the Dynamics of Sukuk Bonds and Prices in Emerging Market Indices

“…Basically, it is a market where bondholders pursue the bond investment until its maturity and are traded at a limited level in the secondary market (Godlewski et al 2013;Alahouel and Loukil 2021). Now Sukuk offers special exchanges, that is, the first exchange is Dubai International Finance Exchange (DIFE), the second Market in Vienna and the Third Market Labuan Exchange in Malaysia (Abdel-Khaleq and Richardson 2006;Samitas et al 2021;Rahman et al 2020). In western countries, England may come out as the primary bridge between Islamic finance and conventional means of capital.…”