Behavior in Bond Market: Conventional vs. Sukuk bonds

Abstract

The sukuk and conventional bonds have some characteristics that are similar to conventional bonds, so some people think both bonds are behave or act same way in the bond market. To examine the behavior of both bonds this study used Malaysian bond market and Pakistan bond market with the comparison of sukuk and conventional bonds. Because both countries are Islamic countries and uses Sukuk bond as alternative debt instrument for generating funds. Secondary and daily time series data, bond prices is used in this study that consists of government treasury bonds (T-bonds) of 3 year, 5 year and 10 year and Shari’ah compliant sukuk bonds that include 3 year, 5 year and 10 year government Ijarah sukuk bonds of both countries Pakistan and Malaysia. The data on Malaysian bond market was taken from the period 31st Dec, 2004 to 19th June 2020 and on Pakistan bond market the data was taken from the period 21st Jan 2011 to 19th June 2020. The descriptive statistic was used to check the normality of data and Augmented Dickey Fuller (ADF) method was used for stationarity. The granger Causality test was used to examine whether the change in conventional bonds return does have impact on sukuk bonds returns. And whether the change in sukuk returns does have impact on conventional bonds returns. The result conclude that the returns of conventional bond did not granger cause sukuk bonds returns. And sukuk bonds returns does not granger cause conventional bonds return. The change in returns of one type of bond does not effect and influence the other type of bond. They both behave differently in bond market in terms of return. But the 5 year Pakistan Sukuk Ijarah and T bonds F statistic value is below 0.05 which indicates that the change in ones returns also impact the change in other but its probability is above 0.05 which indicates insignificant relationship. However the overall result is that both bonds nor impacts each other and neither behaves same way in a bond market.