Does Sukuk Offer Portfolio Diversification Benefits During Crisis? Evidence from GARCH Analysis.

Abstract

Islamic finance has gained prominence as a credible alternative to conventional finance, particularly following its resilience during the 2008 Global Financial Crisis. This study examines the volatility dynamics of Sukuk and conventional bond across the World, MENA and GCC regions, with a special focus on the Covid-19 pandemic period and its implication for investors. Using daily data from January 2019 to February 2021, a Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model is employed to analyse the return volatility. The results reveal that Sukuk indices outperformed conventional bond indices in certain regions during specific period, while the opposite was observed in others. GARCH results indicate that although both asset classes exhibit high volatility persistence, Sukuk indices generally display lower volatility persistence than their conventional counterparts. Overall, the results suggest that Sukuk may serve as a viable diversification instrument, offering relatively lower volatility during the period of financial distress.