Do Islamic Bond (Sukuk) Prices Reflect Financial and Policy Uncertainty? A Quantile Regression Approach

ABSTRACT

We studied the relationship between Islamic bond (sukuk) prices and financial and policy uncertainty conditions using a quantile regression approach. Our empirical results for the period 2010–2014 show that US bond prices had a negative impact and causality effects on sukuk prices, whereas European Monetary Union bond prices only co-moved with sukuk prices. We also show that financial uncertainty had a negative effect that was limited to intermediate sukuk quantiles; moreover, sukuk prices were not affected by economic policy uncertainty or stock market returns. Therefore, although Islamic bonds are distinctive assets, their price dynamics are dependent on other bond-related asset prices and so incorporate financial market uncertainty.

JEL CLASSIFICATION:

• C31
• C58
• G12

KEY WORDS:

• financial and policy uncertainty
• quantile regression
• Sukuk

Notes

1. Policy uncertainty (i) predicts future recessions if combined with financial factors (Karnizova and Li 2014); (ii) co-moves with stock market returns and implied volatility (Antonakakis et al. 2013), (iii) negatively impacts corporate investment (Wang, Chen, and Huang 2014), (iv) impacts on the economy, equity markets, and business cycles (Alexopoulos and Cohen 2015), (v) affects economic fundamentals in the short and long run (Sin 2015), and (vi) impacts US stock–bond correlations (Li et al. 2015).

2. The issue size must be US$ 200 million or greater. The minimum maturity is 1 year and securities must be rated at least BBB-/Baa3 by S&P, Moody’s, or Fitch.

3. Market capitalization is defined as the total value of sukuk issued calculated by multiplying the sukuk price by the number of sukuk issued.

4. The DJIM, like the DJSI, excludes companies whose primary business is alcohol, tobacco, drugs, certain food products, gambling, weapons, entertainment, and conventional finance. Companies passing the first screening are then checked in a second screening consisting of financial ratios, which may not exceed 33.33%.