Ṣukūk or Bond, Which Is More Sustainable during COVID-19? Global Evidence from the Wavelet Coherence Model

Shabeer Khan · Niaz Ahmed Bhutto · Uzair Abdullah Khan · Mohd Ziaur Rehman · Wadi B. Alonazi · Abdullah Ludeen

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Islamic Finance and Banking Studies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

Understanding the co-movement and lag–lead relations among indices is integral to financial decision making. These parameters show the reactiveness of the market towards new information. Understanding them helps to minimize risk and facilitates optimal portfolio diversification. By employing the wavelet coherence econometric model, the authors of this study analyzed the intricate relations among the Bond and Ṣukūk indices using global data belonging to the United States (US), the United Kingdom (UK), Middle East and North Africa (MENA), and Gulf Cooperation Council (GCC) countries. The findings indicated the presence of strong but similar implications of the initial shock of COVID-19 deaths on both Islamic and conventional markets’ volatilities, especially in long-term investment bands (64–128 days). The results oppose the general belief that Islamic finance is more sustainable and less volatile to crises than its traditional counterparts. Moreover, the authors of this study report diverse relationships among bond and Ṣukūk indices throughout the sample periods. We consistently found low correlations in short-term investment bands (4–16), leading to optimal diversification opportunities. However, high correlations were reported due to COVID-19 in the long-term investment bands (128–256), leading to low diversification opportunities for long-term investors.

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2002Dynamic Conditional Correlation 2020Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns 2020Stock markets’ reaction to COVID-19: Cases or fatalities?2004An Empirical Analysis of Stock and Bond Market Liquidity 2005International Stock Return Comovements 2020Searching for safe-haven assets during the COVID-19 pandemic 2005Stock Market Uncertainty and the Stock-Bond Return Relation 1998Information and volatility linkages in the stock, bond, and money markets11This paper was previously under the title, `Volatility and common information in the stock, bond, and money markets’. We thank Paul Seguin (the referee) for numerous suggestions that substantially imporved the paper. We also received the helpful comments from Bill Schwert (the editor), David Ellis, Wayne Ferson, John Graham, Bruce Grundy, Kathleen Weiss Hanley, Larry Harris, George Kanatas, Tom Smith, Raul Susmel, and Bob Whaley, and seminar participants at the 1996 Texas Finance Symposium, the 1997 American Finance Association meetings in New Orleans, The Australian Graduate School of Management, the University of Houston, Rice University, the University of Texas at Austin, the University of Utah, and the University of Washington. Part of this research was completed while the second author was visiting Rice University.

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