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