GARCH-M Analysis of Sukuk Indices Post the 2008 Financial Crisis: Empirical Study on Different Sukuk Ratings

Abstract

The higher the volatility (as a proxy of risk) during the crisis, the higher the probability of sukuk defaults. The investigation of the sukuk market’s efficiency in the sample period of study is essential since volatility will impact long-term market efficiency. The daily data of historical prices from 2006 to 2015 for all sukuk indices by different ratings (DJSUK3AT, DJSUK2AT, DJSUK1AT, and DJSUK3BT) have been collected from the Bloomberg database (Saturdays and Sundays excluded). The GARCH-in-Mean (GARCH-M) model has been implemented to identify sukuk market efficiency types. The highest quality rating (AAA) and excellent rating (AA) of sukuk (DJSUK3AT and DJSUK2AT) were recorded as the best leading market indicator based on the market efficiency analysis. Hence, the study of sukuk market efficiency is significant to investors and issuers since the results can be used as indicators in identifying the best situation to invest in and issue the sukuk.