A comparison between Sukuk and Conventional bonds in terms of Volatility
Abstract
Purpose – The main aim of the study is to investigate the impact of volatility in sukuks as
compared to conventional bonds. A critical evaluation of the factors that impact volatility
of sukuks and conventional bonds, measurement and comparison of the volatility of sukuks
and conventional bonds using GARCH Model are the key focus areas of the study.
Methodology and Data Collection – Multivariate GARCH model has been selected due
to the covariance matrix which can be modelled to include multiple asset returns and is a
favourite choice for inclusion in risk management, portfolio selection and asset management
modelling. The utilised data has been obtained from two market indices: Down Jonesand
(S&P5 ) Standard and Poors for the period between 2009 and 2019 were retrieved and computed.
The data is processed with RStudio software.
Research Findings – The findings demonstrate that there is indifference in volatility between
conventional bonds and Sukuk which is demonstrated by time-varying positive correlation
between conventional bonds and Sukuk . The two kinds of securities are influenced
by the same factors, particularly under worldwide economic factors. Compliance with the
rules of Shariah does not present extra vulnerabilities or benefits as both forms of securities
are dependent on macroeconomic and financial networks and their mechanics operate similarly.
Implications – Traditional and Sukuk bonds are affected by symmetric volatility, and hence
experience the same type of volatilities. While Sukuk is designed to be distinct from traditional
bonds, it is in many ways similar to the latter. Also, Sukuk assets to be less volatile and
worked in improving portfolio balance and risk reduction through portfolio diversification
when considered with other assets