Islamic stock-sukuk indexes' correlations: does financial uncertainty matter?

Purpose - This study examines co-movements between global Islamic index and heterogeneous rated/maturity sukuk. It tests the impact of financial uncertainty on these movements. Design/methodology/approach - Firstly, we conduct a bivariate wavelet analysis to assess the co-movements between stocks and sukuk indexes. Secondly, we use General dynamic factor model and stochastic volatility to construct financial uncertainty index from Islamic stock indexes. Finally, we run regression analysis to determine the impact of uncertainty on the obtained correlations. Findings - Our results suggest the absence of flight to quality phenomenon since correlations are positive especially at a short investment horizon. There is evidence of contagion phenomena across assets. Financial uncertainty may be considered as a determinant of stock-sukuk co-movements. Our results show that a rise in financial uncertainty induces correlation to move in the opposite direction in the short term, (exception for correlation with AA-Rated sukuk). However, the sign of stock market uncertainty becomes positive in the long term, which leads sukuk and stocks to move in the same direction (exception for 1–3 Year and AA Rated sukuk). Practical implications - Investors may combine sukuk with 1–3 Year maturity and AA Rated when considering long holding periods. Further, all sukuk categories provide diversification benefit in time high financial uncertainty expectation for AA Rated sukuk when considering short holding periods. Originality/value - To the best of our best knowledge, our study is the first investigation of the impact of financial uncertainty on Stock-sukuk co-movements and provides recommendation considering sukuk with different characteristics.