Common Risk Factors in Returns on Sukuk Investment

Sarkar Kabir, Md Hamid Uddin, M. Kabir Hassan, Mohammed Sawkat Hossain, Jia Liu

Research output: Working paper

Abstract

The global interest in sukuk, an Islamic alternative to bond financing, has grown rapidly, particularly after the 2008 global financial crisis, due to its distinctive features and investment quality. Sukuk were first launched in Malaysia and are presently available in 29 countries, including the United Kingdom, United States, Singapore, Hong Kong, and Luxembourg. Despite the global market prevalence of sukuk, asset pricing literature has not yet addressed the pricing mechanism of sukuk, which is inherently different from bonds and equity due to the contractual differences. However, analysts use LIBOR, or the Islamic interbank benchmark rate (IIBR), as the ad-hoc benchmark to evaluate sukuk performance. In this study, we develop a basic pricing model that captures the common risks in sukuk returns. We identify two risk factors for sukuk that require risk premiums: (i) sukuk market risk and (ii) information asymmetry risk. Using these two common sukuk risk factors, investment analysts can estimate the fair value of sukuk more precisely than other ad hoc measures available.
Original languageEnglish
Publication statusIn preparation - 2019

Fingerprint

Return on investment
Analysts
Ad hoc
Benchmark
Risk factors
Equity
Global financial crisis
Hong Kong
Pricing mechanism
Information asymmetry
Asset pricing
Singapore
Bond financing
Global market
Fair value
Risk premium
Market risk
Malaysia

Keywords

  • Sukuk pricing; Reference rate; Systematic risk factors; Two factor model

Cite this

Kabir, S., Uddin, M. H., Hassan, M. K., Hossain, M. S., & Liu, J. (2019). Common Risk Factors in Returns on Sukuk Investment.

Common Risk Factors in Returns on Sukuk Investment. / Kabir, Sarkar; Uddin, Md Hamid ; Hassan, M. Kabir; Hossain, Mohammed Sawkat ; Liu, Jia.

2019.

Research output: Working paper

Kabir, S, Uddin, MH, Hassan, MK, Hossain, MS & Liu, J 2019 'Common Risk Factors in Returns on Sukuk Investment'.
Kabir S, Uddin MH, Hassan MK, Hossain MS, Liu J. Common Risk Factors in Returns on Sukuk Investment. 2019.
Kabir, Sarkar ; Uddin, Md Hamid ; Hassan, M. Kabir ; Hossain, Mohammed Sawkat ; Liu, Jia. / Common Risk Factors in Returns on Sukuk Investment. 2019.
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