Sukuk and bond dynamics in relation to exchange rate

• Published in: International journal of Islamic and Middle Eastern finance and management Vol. 16; no. 3; pp. 621 - 646
• Main Authors: Billah, Syed Mabruk, Nguyen, Thi Thu Ha, Chowdhury, Md Iftekhar Hasan
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 14.04.2023; Emerald Group Publishing Limited
• Subjects: Bond markets; Coherence; COVID-19; Currency; Economic crisis; Financial instruments; Floating exchange rates; Foreign exchange markets; Foreign exchange rates; Government bonds; International finance; Investments; Islam; Islamic financing; Pandemics; Prices; Securities markets; Time series; Volatility; Witnesses; Middle East; Asia; Europe; E52; D53; Cointegration; F31; Sukuk; C58; F36; Wavelet analysis; Bond; Exchange rate; Comovement
• DOI: 10.1108/IMEFM-01-2022-0024
• ISSN: 1753-8394

Purpose This study aims to contribute by expanding the existing literature on Sukuk return and volatility and exploring the implications of the Sukuk-exchange rate interactions. Design/methodology/approach This study examines the dynamic interactions of Sukuk with exchange rate in 15 countries, employing the Wavelet approach that considers both time and investment horizons. Findings The results reveal significant evolving coherence of Sukuk return and volatility with the underlying exchange rate. The relationship is more potent than what this study witnesses in their counterpart bond market. For Sukuk returns, the coherence is negative, whereas it is positive for volatility. Notably, the coherence is strong in the medium to long term and intensifies during extreme economic episodes, especially during the COVID-19 pandemic. These findings are further validated by comparing firm-level matched data for Sukuk and conventional bond. Originality/value To the best of the authors’ knowledge, this is the first study that reports the dynamic relationship of Sukuk return and volatility with the underlying exchange rate in 15 countries. Collectively, this study unites valuable insights for faith-based active Islamic investors and cross-border portfolio managers.