The empirical study on market liquidity and determinants of Sukuk in Malaysia

Abstract

The purpose of this study is to examine the relationship between market liquidity and the determinants of Sukuk in Malaysia’s perspective. This study is also to determine whether the Sukuk market is also reacting as similar to the bond market regarding market liquidity. A sample of 933 issued Sukuk in Malaysia is collected from secondary data of Bond Pricing of Agency Malaysia (BPAM) and Bond Info hub of Bank Negara Malaysia from the period of 2005 to 2015. The sample of issued Sukuk is based on Malaysian Ringgit denominated currency and these Sukuk are actively traded in the secondary market of Malaysia. The sample comprises five (5) sectors inclusive government, quasi-government, finance; Asset-Backed Securities (ABS) and corporates. Market Microstructure Theory is using on the impact of numerous market frictions in the market structure and individual behaviour during the price determination process in this study. The empirical results of this study show that age and maturity have a positive relationship with Sukuk market liquidity and they are significantly correlated. The findings of this study could assist investors in the making decision by choosing the right type of Sukuk structure and by utilising the suitable Sukuk determinants at the right time. From the analysis, the researcher concludes that investors prefer to hold their securities until meeting its maturity rather than traded it in the secondary market. Further research should be done by incorporating other liquidity factors such as the liquidity risk, yield spread and price in order to have more input to the study on liquidity since the Sukuk market is increasing in demand and becomes more sophisticated as the financial market is moving towards digitalisation and electrification.