Abstract
Investors are interested in knowing whether sukuk bonds and shariah stock indices in the Gulf Corporation Council (GCC) region are related. This study examines the connectedness between the sukuk- and shariah-compliant stock indices in the GCC financial markets. Bivariate and multivariate wavelet approaches are applied to the daily data covering the period 10 July 2008 to 15 May 2017. The empirical findings demonstrate a strong correlation between these GCC sukuk bond indices and shariah stock indices. The degree of connectedness between these sukuk and shariah stock indices varies across time and scale. A strong and positive association is observed in the short term and a negative association is evident in the long term. The same findings are observed, using the wavelet cohesion approach that also validates the existence of portfolio diversification opportunities at a short-time horizon. The multivariate cross-correlation analysis reveals that these sukuk and shariah stock markets are highly integrated across time and scale. Furthermore, the value at risk (VaR) for the sukuk bond–shariah stocks portfolio is performed to highlight the significance of the wavelet analysis. The outcomes show that portfolio stocks are variable with respect to time or scale (time diversification). Overall, analyzing the sukuk bond–shariah stock index returns in the GCC at a multiscale level makes it easier for financial agents dealing with heterogeneous trading horizons to assess the benefits of diversifications.
Highlights
The global Islamic financial market has shown an impressive expansion during the last decade, because of strong investment in the halal sector, infrastructure, and shariah-compliant financial instruments
Shariah-compliant assets represent a significant portion of total banking assets of the Gulf Corporation Council (GCC)
The study used cross-sectional data and the results show that investment in the sukuk bond was the most important factor influencing investor behavior
Summary
The global Islamic financial market has shown an impressive expansion during the last decade, because of strong investment in the halal sector, infrastructure, and shariah-compliant financial instruments. From a portfolio diversification view, managers of Islamic portfolios are more interested in asset price co-movement at higher frequencies, while some others are interested at lower frequencies It would be helpful for portfolio managers to resort to an appropriate frequency domain to provide a better perception of the shariah-compliant stocks and sukuk co-movement behavior at the frequency level. The reason behind the issuance of Islamic assets is to assist governments and corporates to finance their investment deficits after the end of the persistently low energy price period from 1979 to 1980 Sukuk prove their worth in financing infrastructure and supporting investments in the GCC countries. It is essential for portfolio managers and sukuk issuers to understand the co-movement of sukuk indices over time and scale to better design their hedging strategies and the allocation of assets.
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