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Why do sukuks (Islamic bonds) need a different pricing model?

Research output: Contribution to journalArticlepeer-review

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Why do sukuks (Islamic bonds) need a different pricing model? / Uddin, Md Hamid; Kabir, Sarkar H.; Kabir Hassan, Mohammad; Hossain, Mohammed S.; Liu, Jia.

In: International Journal of Finance and Economics, 17.09.2020.

Research output: Contribution to journalArticlepeer-review

Harvard

Uddin, MH, Kabir, SH, Kabir Hassan, M, Hossain, MS & Liu, J 2020, 'Why do sukuks (Islamic bonds) need a different pricing model?', International Journal of Finance and Economics. https://doi.org/10.1002/ijfe.2269

APA

Uddin, M. H., Kabir, S. H., Kabir Hassan, M., Hossain, M. S., & Liu, J. (2020). Why do sukuks (Islamic bonds) need a different pricing model? International Journal of Finance and Economics. https://doi.org/10.1002/ijfe.2269

Vancouver

Uddin MH, Kabir SH, Kabir Hassan M, Hossain MS, Liu J. Why do sukuks (Islamic bonds) need a different pricing model? International Journal of Finance and Economics. 2020 Sep 17. https://doi.org/10.1002/ijfe.2269

Author

Uddin, Md Hamid ; Kabir, Sarkar H. ; Kabir Hassan, Mohammad ; Hossain, Mohammed S. ; Liu, Jia. / Why do sukuks (Islamic bonds) need a different pricing model?. In: International Journal of Finance and Economics. 2020.

Bibtex

@article{0dbea324e53d467b8980164bd62266a9,
title = "Why do sukuks (Islamic bonds) need a different pricing model?",
abstract = "The global interest in sukuk, an Islamic alternative to bond financing, has grown rapidly, particularly after the 2008 global financial crisis, due to its distinctive features and investment quality. Sukuk were first launched in Malaysia and are presently available in 29 countries, including the United Kingdom, United States, Singapore, Hong Kong, and Luxembourg. Despite the global market prevalence of sukuk, asset pricing literature has not yet addressed the pricing mechanism of sukuk, which is inherently different from bonds and equity due to the contractual differences. However, analysts use LIBOR, or the Islamic interbank benchmark rate (IIBR), as the ad-hoc benchmark to evaluate sukuk performance. In this study, we develop a basic pricing model that captures the common risks in sukuk returns. We identify two risk factors for sukuk that require risk premiums: (i) sukuk market risk and (ii) information asymmetry risk. Using these two common sukuk risks factors, investment analysts can estimate the fair value of sukuk more precisely than other ad hoc measures available.",
keywords = "Sukuk pricing, Reference rate, Systematic risk factors, Two factor model",
author = "Uddin, {Md Hamid} and Kabir, {Sarkar H.} and {Kabir Hassan}, Mohammad and Hossain, {Mohammed S.} and Jia Liu",
year = "2020",
month = sep,
day = "17",
doi = "10.1002/ijfe.2269",
language = "English",
journal = "International Journal of Finance and Economics",
issn = "1076-9307",
publisher = "Wiley-Blackwell",

}

RIS

TY - JOUR

T1 - Why do sukuks (Islamic bonds) need a different pricing model?

AU - Uddin, Md Hamid

AU - Kabir, Sarkar H.

AU - Kabir Hassan, Mohammad

AU - Hossain, Mohammed S.

AU - Liu, Jia

PY - 2020/9/17

Y1 - 2020/9/17

N2 - The global interest in sukuk, an Islamic alternative to bond financing, has grown rapidly, particularly after the 2008 global financial crisis, due to its distinctive features and investment quality. Sukuk were first launched in Malaysia and are presently available in 29 countries, including the United Kingdom, United States, Singapore, Hong Kong, and Luxembourg. Despite the global market prevalence of sukuk, asset pricing literature has not yet addressed the pricing mechanism of sukuk, which is inherently different from bonds and equity due to the contractual differences. However, analysts use LIBOR, or the Islamic interbank benchmark rate (IIBR), as the ad-hoc benchmark to evaluate sukuk performance. In this study, we develop a basic pricing model that captures the common risks in sukuk returns. We identify two risk factors for sukuk that require risk premiums: (i) sukuk market risk and (ii) information asymmetry risk. Using these two common sukuk risks factors, investment analysts can estimate the fair value of sukuk more precisely than other ad hoc measures available.

AB - The global interest in sukuk, an Islamic alternative to bond financing, has grown rapidly, particularly after the 2008 global financial crisis, due to its distinctive features and investment quality. Sukuk were first launched in Malaysia and are presently available in 29 countries, including the United Kingdom, United States, Singapore, Hong Kong, and Luxembourg. Despite the global market prevalence of sukuk, asset pricing literature has not yet addressed the pricing mechanism of sukuk, which is inherently different from bonds and equity due to the contractual differences. However, analysts use LIBOR, or the Islamic interbank benchmark rate (IIBR), as the ad-hoc benchmark to evaluate sukuk performance. In this study, we develop a basic pricing model that captures the common risks in sukuk returns. We identify two risk factors for sukuk that require risk premiums: (i) sukuk market risk and (ii) information asymmetry risk. Using these two common sukuk risks factors, investment analysts can estimate the fair value of sukuk more precisely than other ad hoc measures available.

KW - Sukuk pricing

KW - Reference rate

KW - Systematic risk factors

KW - Two factor model

U2 - 10.1002/ijfe.2269

DO - 10.1002/ijfe.2269

M3 - Article

JO - International Journal of Finance and Economics

JF - International Journal of Finance and Economics

SN - 1076-9307

ER -

ID: 22688487