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Do Sukuk provide diversification benefits to conventional bond investors? Evidence from Turkey

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  • Pirgaip, Burak
  • Arslan-Ayaydin, Özgür
  • Karan, Mehmet Baha

Abstract

We investigate the contribution of Sukuk in diversification of bond portfolios. We do so by comparing Turkish bond funds that invest exclusively in conventional bonds (pure conventional bond funds), in Sukuk (pure Islamic bond funds), and in both (mixed bond funds) among each other for the period of 2014–2019. We employ tests of differences in means and variances of various risk-return measures as well as mean-variance spanning and intersection tests in order to uncover the diversification potentials of Sukuk in the portfolio management industry. Our results suggest that bond funds, of which the portfolios are composed of a combination of Sukuk and conventional bonds (i.e. mixed bond funds), have a relatively “lower risk-higher return” profile. Moreover, including Sukuk to conventional bond portfolios theoretically offers significant diversification opportunities for investors, particularly when the economy worsens.

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  • Pirgaip, Burak & Arslan-Ayaydin, Özgür & Karan, Mehmet Baha, 2021. "Do Sukuk provide diversification benefits to conventional bond investors? Evidence from Turkey," Global Finance Journal, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:glofin:v:50:y:2021:i:c:s1044028319303151
    DOI: 10.1016/j.gfj.2020.100533
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    More about this item

    Keywords

    Conventional bond funds; Islamic bond funds; Sukuk; Diversification; Modern portfolio theory;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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