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, 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: (a) sukuk market risk and (b) information asymmetry risk. Using these two common sukuk risks factors, investment analysts can estimate the fair value of sukuk more precisely than other ad hoc measures available.
Bibliographical noteFunding Information:
We thankfully acknowledge the funding received from Taylor's University, Malaysia for this study. We thank the participants who attended our presentation at the British Accounting and Finance Association conference, 10–11 April 2018 and provided useful comments. We are also thankful to the discussant and participants at the Malaysian Finance Association meeting on 1–2 August 2018 and Taylor's University research colloquium, 12 March 2018 for sharing their comments.
© 2020 John Wiley & Sons Ltd
- reference rate
- sukuk pricing
- systematic risk factors
- two factor model
ASJC Scopus subject areas
- Economics and Econometrics
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