Return Spillovers and Market Integration in Islamic Finance: Return Spillovers and Market Integration in Islamic Finance: Empirical Evidence from Sukuk and Sectoral Indices Empirical Evidence from Sukuk and Sectoral Indices

Abstract

This study investigates the return spillovers and their underlying determinants in nineteen sukuk markets from 4 regions. Using the Diebold and Yilmaz (2014) and wavelet coherence approaches, this study quantifies the dynamic spillover index (DSI) and identifies the key determinants for aggregate and regional Sukuk markets. The findings reveal that the sukuk market return is moderately vulnerable to exogenous economic shocks, providing potential diversification benefits for investors. Though the collective spillovers follow a downward trend, as the markets mature, the total spillover intensity increases significantly throughout the COVID-19 period. Wavelet coherence further indicates that the global Islamic equity market (MSCI_I) and European currency volatility (EVZ) are the key driver of full-sample Sukuk spillovers. However, regional decomposition discloses systematic heterogeneity in spillover determinants: crude oil volatility (OVX) and EVZ dominate for GCC markets, EVZ for Asian markets, VIX for African markets, and VIX and OVX for European sukuk market — underscoring that a uniform monitoring framework is insufficient across structurally distinct Islamic market environments. The findings are of intrinsic interest and offer practical insights to Islamic portfolio managers and policymakers towards ethical investment in the light of intensified market integration.