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The determinants of co-movement dynamics between sukuk and conventional bonds
- Publication Year :
- 2017
-
Abstract
- This paper adopts a multivariate GARCH framework to examine conditional correlations and volatility linkages between sukuk (Islamic bonds) and conventional bond markets in Europe, the United States, and emerging markets. We find that sukuk and conventional investment-grade bonds have a lower reaction of conditional volatility to market shocks and higher persistence; we also find that sukuk returns are much less volatile than U.S. and EU investment-grade bonds. Further, we find a time-varying, positive, conditional correlation between sukuk returns and leading bond markets, which is driven by changing macroeconomic and market conditions. We observe that during recessions, the dynamic correlation between sukuk and bond markets tends to increase. Moreover, we unveil structural breakpoints in paths of dynamic correlations corresponding to external shocks, such as the sovereign debt crisis and the Federal Reserve’s tapering announcements. Finally, we examine how market-wide factors affect correlations. We find significant behavioral shifts in the sukuk-bonds relationship, which are explained by market liquidity, crude oil prices, U.S. credit information, and stock market uncertainty. Our results have useful implications for sukuk issuers, portfolio managers, and risk managers in both emerging and developed markets.
- Subjects :
- Islamic finance
Economics and Econometrics
diversification
Financial economics
Diversification (finance)
Dynamic correlation
Sukuk
corporate bonds
Settore SECS-P/11 - ECONOMIA DEGLI INTERMEDIARI FINANZIARI
0502 economics and business
Economics
050207 economics
Emerging markets
Corporate bond
050208 finance
Bond
05 social sciences
Market liquidity
Diversification
Bond market
Multivariate GARCH
Stock market
Volatility (finance)
Finance
dynamic correlations
Subjects
Details
- Language :
- English
- Database :
- OpenAIRE
- Accession number :
- edsair.doi.dedup.....565f59a2eed670eeab13d413f91c1e7e