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ABSTRACT
Even though numerous studies have looked at the spillover effects in Shari’ah compliant equity returns, little attention has been paid to exploring global shocks’ transmission to the sukuk (Islamic Bond) returns. Our paper attempts to fill this void by quantifying spillovers from developed countries on the sukuk returns of Islamic countries. In this paper, we create sukuk indices for financial and non-financial companies on country basis and, examine the global linkages with those sukuk indices. We have found that global sukuk markets affect the sukuk indices at different levels. A clear distinction would be that global sukuk markets have a substantial impact on the spillovers of the sukuk issued by financial corporations, while sukuk issued by non-financial corporations are more affected by the overall spillover effect the sukuk markets than spillovers from the global Islamic bond markets. Sub-sample analysis during the COVID-19 pandemic yield interesting findings, show that spillover of returns on the sukuk issued by financial corporations during the COVID-19 pandemic was higher than the sukuk issued by non-financial corporations. These findings are mostly consistent for all markets included in our sample and evidently, urge portfolio holders to make clear distinctions between sukuk issued by financial and non-financial corporations.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 The sukuk market surged to over half a trillion US dollars from around $33.6 billion over 12 years–2006 to 2018–demonstrating its extreme levels of growth in recent years (Ibnu Citation2019).
2 see, for example, Yilmaz et al. (Citation2015); Sensoy (Citation2016); Hkiri et al. (Citation2017); Rizvi and Arshad (Citation2018); Hassan et al. (Citation2018); Chowdhury, Balli, and Hassan (Citation2021).
3 We excluded Oman from our estimations due to lack of data.
4 The technical document is available at: http://www.bloombergindices.com/content/uploads/sites/2/2016/01/633470877_INDX_GFI_WP_151022.pdf.
5 For Sukuk pricing, we use the Bloomberg Generic Price (BGN), the market consensus price for corporate and government bonds, which is calculated using prices from multiple sources to provide a very accurate rate.
6 The Dow-Jones Sukuk Index captures the global returns of the sukuk indices issued in the world. This index was first introduced in April 2006 to expose global Islamic fixed income securities. According to index methodology, this index contains United States Dollar (USD)-denominated investment-grade Sukuk issued in the global markets that have been designed for Shari’ah compliance. This index is similar to the Dow-Jones Islamic Market (DJIAM) index. The Dow-Jones Sukuk Index was also created as a benchmark for investors seeking exposure to Shari’ah-compliant fixed-income investments.
7 Burns, Engle, and Mezrich (Citation1998) show that aggregation into weekly returns can avoid problems that arise from asynchronous trading hours. Therefore, our data has been checked for related issues. We first investigate whether it is possible to predict current market returns based on lagging returns from markets closed for the day, but – for all country sector combinations – this has not been accepted. Although it was found that the monthly return-based relationship was typically higher than the weekly return-based relationship, it was not possible to attribute this to the problem of asynchronous trading hours. The difference between the two relations is relatively small in relations with Japan, which is likely to be most affected by this problem, while the greatest difference is in relations between Britain and Germany, where the problems are not as severe.
8 Monthly correlations exhibit the same trend behavior as weekly correlations. Based on monthly returns between 1960 and 1990, Longin and Solnik (Citation1995) found a correlation between the US stock market and several other stock markets that had increased.
9 We also use last week’s price (i.e. Wednesday) for the weekly forecast of returns. Data lost on Wednesday will be replaced by the closing price of the last trading day. The results show no remarkable correlation.
10 The March 2013 Financial Services Act, the impact of persistent European debt problems from several member countries, including Spain, Italy and Greece, increased anxiety surrounding China’s economic slowdown in the first half of 2012, and growing concerns about China’s shadow financial institution faced problems from Malaysian Airlines in 2014, and the collapse of Chinese financial markets in August 2015, as well as instability and political strikes in November 2016.
11 We also inspect the quantile spillover table and index with different sub-periods, such as European Debt Crisis (EDC) (2011–2013) and Shale Oil Revolution (SOR) (2014–2016). Quantile connectivity measurement results are available on request from authors. However, they are very similar to the assessed connectivity measures at the middle (50th quantile), lower (5th quantile) and upper (95th quantile).