Return, risk and risk premium of Islamic Sukuk and conventional bonds

Abstract

Sukuk play a major role in the development of the Islamic capital market and they are fundamentally different from traditional bonds. This study aims at analyzing and comparing the behavior of return, risk and risk premium of Islamic Sukuk and conventional bonds. We use the daily data of the Dow Jones Islamic Sukuk Index and two conventional bond indices: S&P 500 for US corporate bonds and S&P US Treasury Bonds during 30/05/2008-20/10/2017. We analyzed the time series and stationary analysis, the correlation and the GARCH-M model, as well as Ganger's causal test. We conclude that the sukuk index has a higher overall risk and a lower average return than conventional bond indices during the study period; long term risk is higher for sukuk. The risk premium is positive for sukuk and conventional bonds but has a higher value for sukuk. Sukuk and conventional bond returns are inversely correlated with LIBOR and there is causality in both directions. There is no continuity in shocks in Sukuk index returns, unlike conventional bonds.