Exploring the Dynamic Links between GCC Sukuk and Commodity Market Volatility

Nader Naifar

doi:10.3390/ijfs6030072

Abstract

This study investigates the impact of commodity price volatility (including soft commodities, precious metals, industrial metals, and energy) on the dynamics of corporate sukuk returns. Using a sample of sukuk indices from Gulf Cooperation Council (GCC) countries, we study the dynamic conditional correlation using a multivariate generalized autoregressive conditional heteroskedasticity dynamic conditional correlation (GARCH-DCC) process. Empirical results show a time-varying negative correlation between GCC sukuk returns and commodity prices. In fact, a negative conditional correlation among assets of a given portfolio implies higher gain-to-risk ratios. An understanding of volatility and dynamic co-movements in financial and commodity markets is important for portfolio allocation and risk management practices.

Highlights

Commodity prices have fallen over the past few years, and this decline has been accompanied by a severe slowdown in economic growth in emerging market economies that rely on the export of primary commodities
The sukuk market is well developed in Malaysia and the Gulf Cooperation Council (GCC) countries
Malaysia dominates the market for sukuk issuances and is the only jurisdiction to allow for the trading of debt-based structures

Summary

Introduction

Commodity prices have fallen over the past few years, and this decline has been accompanied by a severe slowdown in economic growth in emerging market economies that rely on the export of primary commodities. The recent collapse of oil prices and the accompanying volatility in global equity and bond market returns have raised the importance of studying the nature of the relationship between financial markets and commodity markets. An increasing correlation in the returns of financial markets and commodity indices would discourage investors from choosing commodities as a refuge during periods of stress. Among global Islamic financing instruments, sukuk (Islamic bonds) have become the most widely-used financial securities. The sukuk market is well developed in Malaysia and the Gulf Cooperation Council (GCC) countries. GCC countries constitute an important segment of the market and demand a higher Sharia standard

Objectives

Methods

Results