In Search of Zero Beta Assets: Evidence from the Sukuk Market
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.
[1] Z. Iqbal, “Islamic Financial System”, Finance & Development, vol. 34,
no. 2, pp. 1-4, June 1997.
[2] Islamic Financial Services Board, Capital Adequacy Requirements for
Sukuk, Securitisations and Real Estate Investment, January 2009.
[3] Standard & Poor’s, Islamic Finance Outlook, 2014.
[4] Moody’s, Sovereign Sukuk issuance to rise as new governments enter
Islamic capital markets, Global Credit Research, September 2014.
[5] T. Kuran, Islam & Mammon: The Economic Predicaments of Islamism,
Princeton: Princeton University Press, 2004.
[6] M. Cihak and H. Hesse, “Islamic banks and financial stability: an
empirical analysis”, Journal of Financial Services Research, vol. 38, no.
2, pp. 95-113, 2010.
[7] T. Beck, A. Demirguc-Kunt and O. Merrouche, “Islamic vs conventional
banking: Business model, efficiency and stability”, Journal of Banking
and Finance, vol. 37, no. 2, pp.433-447, 2013.
[8] M. A. El-Gamaland I. Hulusi, “Inefficiency and heterogeneity in Turkish
banking: 1990-2000”, Journal of Applied Economics, vol. 5, pp. 641-
664, 2005.
[9] S. A. Srairi, “Cost and profit efficiency of conventional and Islamic
banks in GCC countries”, Journal of Productivity Analysis, vol34, pp
45-52, 2010.
[10] M. Abdull-Majid, D. Saal and G. Battisti, “Efficiency in Islamic and
conventional banking: an international comparison”, Journal of
Productivity Analysis, vol. 34, pp. 25-43, 2010.
[11] R. Hayat and R.Kraeussl, “Risk and return characteristics of Islamic
equity funds”, Emerging Markets Review, vol. 12, no. 2, pp. 189-203,
2011.
[12] A. G. F. Hoepner, H. G.Rammal and M. Rezec, “Islamic Mutual Funds’
Financial Performance and International Investment Style: evidence
from 20 countries”, The European Journal of Finance, vol. 17, no. 9-10,
pp. 829-850, 2011.
[13] T. Abdulkader and A. Nathif, Islamic Bonds: Your Guide to Structuring,
Issuing and Investing in Sukuk,Economy Institutional Investors. 2004.
[14] M. Iqbal and A. Mirakhor, An Introduction to Islamic Finance: Theory
and Practice, Chichester: John Wiley & Sons, 2007.
[15] S. R. Vishwanath and A. Sabahuddin. “An Overview of Islamic Sukuk
Bonds”, The Journal of Structured Finance, pp. 58-67, Winter 2009.
[16] S. Rusgianto and N. Ahmad, N, “Volatility Behavior of Sukuk Market:
An Empirical Analysis of the Dow Jones Citigroup Sukuk Index”,
Middle East Journal of Scientific Research, vol. 13, pp. 93-97, 2013.
[17] H. Fathurahmanand R. Fitriati, “Comparative Analysis of Return on
Sukuk and Conventional Bonds”, American Journal of Economics, vol.
3, no. 3, pp. 159-163, 2013.
[18] M. Z. M. Zin, A. A.Sakat, N. A. Ahmad, M.Roslan, M. Nor, A.Bhari, S.
Ishak, M. S.Jamain, “The Effectiveness of Sukuk in Islamic Finance
Market”, Australian Journal of Basic and Applied Sciences, vol. 5, no.
12, pp. 472-478, 2011.
[19] F. El Mosaidand R. Boutti,“Sukuk and Bond Performance in Malaysia”,
International Journal of Economics and Finance, vol. 6, no. 2, pp. 226-
234, 2014
[20] S. Cakirand F.Raei, “Sukuk vs Eurobonds: Is There a Difference in
Value-at-Risk”, IMF Working PaperWP/07/237, 2007.
[21] C. J. Godlewski, R. Turk-Ariss and L. Weill, “Sukuk vs conventional
bonds: A stock market perspective”, Journal of Comparative
Economics, vol. 41, pp. 745-761, 2013.
[22] S. F. Najeeb, O. Bacha and M. Masih, “Does a held-to-maturity strategy
impede effective portfolio diversification for Islamic bond (sukuk)
portfolios? A multi-scale continuous wavelet correlation analysis”,
MPRA Paper, no. 56956, June 2014.
[23] D. Hunter and D. Simon, “A conditional assessment of the relationship
between the major world bond markets”, European Financial
Management, vol. 11, no. 4, pp. 463-482, 2005.
[24] Bloomberg, Index Methodology, Global Fixed Income Family
[25] M. Ayub, Understanding Islamic Finance, Chichester: John
Wiley&Sons, 2007.
[26] F. J. Fabozzi, The handbook of fixed income securities, vol. 6, New
York: McGraw-Hill, 2005.
[27] J. B. Yawitz, “The relative importance of duration and yield volatility on
bond price volatility”, Journal of Money, Credit and Banking, vol. 9,
no.1, pp. 97-102, 1977.
[28] Z. Othman Z. and A. S. Kamarudzaman, “The great Sharia debate”,RAM
Bulletin: Sukuk Focus, April-June 2012.
[29] F. Reilly, W. Kao and D. Wright, “Alternative Bond Market Indexes”,
Financial Analysts Journal, vol. 3, no. 48, pp. 44-58, 1992.
[30] G. E. P. Box, G. C. Jenkins and C. Reinsel, Time series analysis:
forecasting and control, Chichester: John Wiley & Sons, 2013.
[31] C. Granger andP. Newbold, “Spurious regressions in econometrics”,
Journal of Econometrics, vol. 4, pp. 111-120, 1974
[32] P. Phillips, “Understanding spurious regressions”, Journal of
Econometrics, vol. 33, pp. 311-340, 1986. [33] S. Johansen, “Statistical analysis of cointegration vectors”, Journal of
Economic Dynamics and Control, vol. 12, pp. 231-254, 1988.
[34] S. Johansen, “Estimation and hypothesis testing of cointegrating vectors
in gaussian vector autoregressive models”, Econometrica, vol. 59, pp.
1551-1580, 1991
[35] D. Harvey andB. Cosgrave, “Liquidity and secondary markets in Islamic
Finance”, Islamic Finance News Special Feature, pp. 22-23, 11 July
2012.
[36] C. M. Jones, K. Gautham and M. L. Lipson, “Transactions, volume, and
volatility”, Review of Financial Studies, vol. 7, no. 4, pp. 631-651, 1994.
[37] H. Gatfaoui, “Is corporate bond market performance connected with
stock market performance?”,Bankers, Markets and Investors, vol. 102,
pp. 45-58, 2009.
[38] S. Arshad and S. A. Rizvi, “The impact of global financials shocks to
Islamic indices: speculative influence or fundamental changes?”,
Journal of Islamic Finance, vol.2, no.1, pp.1-11, 2013.
[39] X. Cheng X. and P. C. B. Phillips, “Semiparametric cointegrating rank
selection”, Econometrics Journal, vol. 12, pp. 83-104, 2009.
[1] Z. Iqbal, “Islamic Financial System”, Finance & Development, vol. 34,
no. 2, pp. 1-4, June 1997.
[2] Islamic Financial Services Board, Capital Adequacy Requirements for
Sukuk, Securitisations and Real Estate Investment, January 2009.
[3] Standard & Poor’s, Islamic Finance Outlook, 2014.
[4] Moody’s, Sovereign Sukuk issuance to rise as new governments enter
Islamic capital markets, Global Credit Research, September 2014.
[5] T. Kuran, Islam & Mammon: The Economic Predicaments of Islamism,
Princeton: Princeton University Press, 2004.
[6] M. Cihak and H. Hesse, “Islamic banks and financial stability: an
empirical analysis”, Journal of Financial Services Research, vol. 38, no.
2, pp. 95-113, 2010.
[7] T. Beck, A. Demirguc-Kunt and O. Merrouche, “Islamic vs conventional
banking: Business model, efficiency and stability”, Journal of Banking
and Finance, vol. 37, no. 2, pp.433-447, 2013.
[8] M. A. El-Gamaland I. Hulusi, “Inefficiency and heterogeneity in Turkish
banking: 1990-2000”, Journal of Applied Economics, vol. 5, pp. 641-
664, 2005.
[9] S. A. Srairi, “Cost and profit efficiency of conventional and Islamic
banks in GCC countries”, Journal of Productivity Analysis, vol34, pp
45-52, 2010.
[10] M. Abdull-Majid, D. Saal and G. Battisti, “Efficiency in Islamic and
conventional banking: an international comparison”, Journal of
Productivity Analysis, vol. 34, pp. 25-43, 2010.
[11] R. Hayat and R.Kraeussl, “Risk and return characteristics of Islamic
equity funds”, Emerging Markets Review, vol. 12, no. 2, pp. 189-203,
2011.
[12] A. G. F. Hoepner, H. G.Rammal and M. Rezec, “Islamic Mutual Funds’
Financial Performance and International Investment Style: evidence
from 20 countries”, The European Journal of Finance, vol. 17, no. 9-10,
pp. 829-850, 2011.
[13] T. Abdulkader and A. Nathif, Islamic Bonds: Your Guide to Structuring,
Issuing and Investing in Sukuk,Economy Institutional Investors. 2004.
[14] M. Iqbal and A. Mirakhor, An Introduction to Islamic Finance: Theory
and Practice, Chichester: John Wiley & Sons, 2007.
[15] S. R. Vishwanath and A. Sabahuddin. “An Overview of Islamic Sukuk
Bonds”, The Journal of Structured Finance, pp. 58-67, Winter 2009.
[16] S. Rusgianto and N. Ahmad, N, “Volatility Behavior of Sukuk Market:
An Empirical Analysis of the Dow Jones Citigroup Sukuk Index”,
Middle East Journal of Scientific Research, vol. 13, pp. 93-97, 2013.
[17] H. Fathurahmanand R. Fitriati, “Comparative Analysis of Return on
Sukuk and Conventional Bonds”, American Journal of Economics, vol.
3, no. 3, pp. 159-163, 2013.
[18] M. Z. M. Zin, A. A.Sakat, N. A. Ahmad, M.Roslan, M. Nor, A.Bhari, S.
Ishak, M. S.Jamain, “The Effectiveness of Sukuk in Islamic Finance
Market”, Australian Journal of Basic and Applied Sciences, vol. 5, no.
12, pp. 472-478, 2011.
[19] F. El Mosaidand R. Boutti,“Sukuk and Bond Performance in Malaysia”,
International Journal of Economics and Finance, vol. 6, no. 2, pp. 226-
234, 2014
[20] S. Cakirand F.Raei, “Sukuk vs Eurobonds: Is There a Difference in
Value-at-Risk”, IMF Working PaperWP/07/237, 2007.
[21] C. J. Godlewski, R. Turk-Ariss and L. Weill, “Sukuk vs conventional
bonds: A stock market perspective”, Journal of Comparative
Economics, vol. 41, pp. 745-761, 2013.
[22] S. F. Najeeb, O. Bacha and M. Masih, “Does a held-to-maturity strategy
impede effective portfolio diversification for Islamic bond (sukuk)
portfolios? A multi-scale continuous wavelet correlation analysis”,
MPRA Paper, no. 56956, June 2014.
[23] D. Hunter and D. Simon, “A conditional assessment of the relationship
between the major world bond markets”, European Financial
Management, vol. 11, no. 4, pp. 463-482, 2005.
[24] Bloomberg, Index Methodology, Global Fixed Income Family
[25] M. Ayub, Understanding Islamic Finance, Chichester: John
Wiley&Sons, 2007.
[26] F. J. Fabozzi, The handbook of fixed income securities, vol. 6, New
York: McGraw-Hill, 2005.
[27] J. B. Yawitz, “The relative importance of duration and yield volatility on
bond price volatility”, Journal of Money, Credit and Banking, vol. 9,
no.1, pp. 97-102, 1977.
[28] Z. Othman Z. and A. S. Kamarudzaman, “The great Sharia debate”,RAM
Bulletin: Sukuk Focus, April-June 2012.
[29] F. Reilly, W. Kao and D. Wright, “Alternative Bond Market Indexes”,
Financial Analysts Journal, vol. 3, no. 48, pp. 44-58, 1992.
[30] G. E. P. Box, G. C. Jenkins and C. Reinsel, Time series analysis:
forecasting and control, Chichester: John Wiley & Sons, 2013.
[31] C. Granger andP. Newbold, “Spurious regressions in econometrics”,
Journal of Econometrics, vol. 4, pp. 111-120, 1974
[32] P. Phillips, “Understanding spurious regressions”, Journal of
Econometrics, vol. 33, pp. 311-340, 1986. [33] S. Johansen, “Statistical analysis of cointegration vectors”, Journal of
Economic Dynamics and Control, vol. 12, pp. 231-254, 1988.
[34] S. Johansen, “Estimation and hypothesis testing of cointegrating vectors
in gaussian vector autoregressive models”, Econometrica, vol. 59, pp.
1551-1580, 1991
[35] D. Harvey andB. Cosgrave, “Liquidity and secondary markets in Islamic
Finance”, Islamic Finance News Special Feature, pp. 22-23, 11 July
2012.
[36] C. M. Jones, K. Gautham and M. L. Lipson, “Transactions, volume, and
volatility”, Review of Financial Studies, vol. 7, no. 4, pp. 631-651, 1994.
[37] H. Gatfaoui, “Is corporate bond market performance connected with
stock market performance?”,Bankers, Markets and Investors, vol. 102,
pp. 45-58, 2009.
[38] S. Arshad and S. A. Rizvi, “The impact of global financials shocks to
Islamic indices: speculative influence or fundamental changes?”,
Journal of Islamic Finance, vol.2, no.1, pp.1-11, 2013.
[39] X. Cheng X. and P. C. B. Phillips, “Semiparametric cointegrating rank
selection”, Econometrics Journal, vol. 12, pp. 83-104, 2009.
@article{"International Journal of Business, Human and Social Sciences:68655", author = "Andrea Paltrinieri and Alberto Dreassi and Stefano Miani and Alex Sclip", title = "In Search of Zero Beta Assets: Evidence from the Sukuk Market", 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.
", keywords = "Asset allocation, asset performance, sukuk, zero beta
asset.", volume = "9", number = "1", pages = "67-9", }
