Comparison between Sukuk and Conventional Bonds: Value at Risk Approach
57 Pages Posted: 13 Feb 2013
Date Written: September 4, 2012
Sukuk market has been growing tremendously since it has first been issued in the global market. However, the debate among scholars in distinguishing Sukuk from its conventional counterpart is still ongoing. This paper aims at assessing the potential difference between Sukuk and conventional bonds by capturing any additional diversification benefit that can be gained by adding Sukuk in to conventional fixed income portfolio. Further, the paper evaluates the risk of Sukuk by measuring its VaR value and compares it with the VaR value of a conventional bond issued by the same issuer in two separate portfolios. The project employs the Delta-Normal Value-at-Risk approach to achieve this goal. The findings of this project imply that Sukuk and conventional bonds prices have different behavior in the secondary market. The results have also confirmed the presence of diversification gains when adding Sukuk to conventional bond portfolio in line to previous literature. Interestingly enough, it is observed that pure Sukuk portfolio is significantly riskier than a pure bond portfolio. This may be due to factors which stems from the characteristics of Islamic finance that underlines Sukuk structuring and engineering.
Keywords: Sukuk, conventional bonds, VaR
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