Is Sukuk Market Efficient? Evidence from the Malaysian Sukuk Market

Nursilah Ahmad,Nor Haziah Hashim,Syazwani Abd Rahim

doi:10.33102/jmifr.v17i2.292

Nursilah Ahmad, Nor Haziah Hashim + Show 1 more

Open Access

https://doi.org/10.33102/jmifr.v17i2.292

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Abstract

Market efficiency in capital markets is used to explain the degree to which prices reflect all available and relevant information about the fundamental value of the securities to help investors make informed decisions. Sukuk are priced according to the value of the assets backing them. The aim of the paper is to measure market efficiency of three Malaysian sukuk indices namely Bloomberg AIBIM Bursa Malaysia Corporate Sukuk Index (AIBIM), Bloomberg Malaysian Sukuk Ex-MYR Index (EXMYR) and Malaysian Foreign Currency Sukuk Index (MFCSUKUK). Daily returns of the three sukuk indices are collected for the period of 2010 until 2015. The efficiency was measured using GARCH-in-Mean (GARCH-M) estimation to identify different types of sukuk market efficiency. The findings indicate that EX-MYR and MFCSUKUK indices display weak form efficient market behaviour while AIBIM falls under the inefficient category. The inefficient market signals that all public information might not be fully reflected in the price, hence there is room for bargaining process or prices could be under or over-valued. For industry players, sukuk structural inefficiencies and sectorial mispricing behavior create investment opportunities due to possible existence of excess profit. For policy makers, an extreme case of inefficient market leads to market failure and welfare loss.

Highlights

Malaysia is seen as a success story of rapid growth and structural change with equity
The present study investigates the types of sukuk market efficiency of three Malaysian Sukuk indices namely Malaysia Sukuk Ex-MYR Index (EX-MYR), Bloomberg Association of Islamic Banking Institutions Malaysia (AIBIM) Bursa Malaysia Corporate Sukuk Index (AIBIM), and Malaysia Foreign Currency Sukuk Index (MFC Sukuk) over the period of 2010 until 2015
The present work examines sukuk market efficiency based on the efficient market hypothesis and random walk theory for three Malaysian sukuk indices

Summary

Introduction

Malaysia is seen as a success story of rapid growth and structural change with equity. Due to the 2008 global financial crisis, the economy has experienced a slowdown in the growth rate. The government has introduced the New Economic Model of 2010 (NEM2010) to shift the country from a middle-income economy to a high-income economy by 2020. In support of these goals, the government has taken steps to liberalize its financial sector to further develop the domestic Islamic financial system (Islamic Development Bank, 2016). The domestic sukuk industry has become an important component of the global sukuk market, with a double-digit average growth per annum. Since its introduction to the global markets in the 1990s, corporate sukuk issuance has been relatively small to its potential.

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