SUKUK-BOND DYNAMIC CO-MOVEMENT AND DRIVING FACTORS: EVIDENCE FROM DCC-GARCH AND WAVELET ANALYSIS

Abstract

The assessment of international financial markets co-movements is crucial due to the valuable information it provides to investors and policy makers that could help in making informed decisions about risk management and investment. However, there is less attention found on fixed-income returns co-movement, where most of the literature had focused on the co-movement between equity markets. This study employed two econometrics methods; the Dynamic Conditional Correlation-GARCH (DCC-GARCH); which helps in studying the time variation in the relationship over time, and Wavelet Coherence that adds frequency domain to the investigation of the dynamic relationship and to extensively examine the co-movement between global Islamic and conventional fixed-income market returns in crisis and non-crisis periods. Data on global indices were used from September 2006 to July 2016. Further, the examination had extended to investigate the impact of macroeconomic and financial uncertainty factors on the co-movement; in order to explore the determinants of the dynamic co-movement. The findings indicate that investors and policy makers should consider the variation in the co-movement on their decision-making process. Also, it suggests that sukuk provides better diversification potential to fixed-income investors as their returns exhibit the least co-movement with bond market returns. However, these benefits do not hold during high-stress periods; as the association between sukuk and other fixed-income market increases substantially during these periods. Moreover, most of the studied macroeconomic and financial uncertainty factors found to be insignificant in explaining the time variation in the fixed-income market returns co-movement with the only exception for inflation in the case of sukuk-bond co-movement.