Abstract: The financial crises caused a collapse in prices of
most asset classes, raising the attention on alternative investments
such as sukuk, a smaller, fast growing but often misunderstood
market. We study diversification benefits of sukuk, their correlation
with other asset classes and the effects of their inclusion in
investment portfolios of institutional and retail investors, through a
comprehensive comparison of their risk/return profiles during and
after the financial crisis.
We find a beneficial performance adjusted for the specific
volatility together with a lower correlation especially during the
financial crisis. The distribution of sukuk returns is positively skewed
and leptokurtic, with a risk/return profile similarly to high yield
bonds. Overall, our results suggest that sukuk present diversification
opportunities, a significant volatility-adjusted performance and lower
correlations especially during the financial crisis.
Our findings are relevant for a number of institutional investors.
Long term investors, such as life insurers would benefit from sukuk’s
protective features during financial crisis yet keeping return and
growth opportunities, whereas banks would gain due to their role of
placers, advisors, market makers or underwriters.