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Assessing Sukuk defaults using value-at-risk techniques

Nafis Alam (Henley Business School Malaysia, University of Reading Malaysia, Iskandar Puteri, Malaysia)
Muhammad Bhatti (Department of Economics and Finance, La Trobe University, Melbourne, Australia)
James T.F. Wong (Mudajaya Group Bhd, Petaling Jaya, Malaysia)

Managerial Finance

ISSN: 0307-4358

Article publication date: 15 June 2018

Issue publication date: 22 June 2018

1015

Abstract

Purpose

The purpose of this paper is to investigate the default characteristics of Sukuk issues by corporate firms in Malaysia using value-at-risk (VaR) techniques over a period of 16 years from 2000 to 2015 and across nine economic sectors.

Design/methodology/approach

The paper employs non-parametric and Monte Carlo simulations to estimate Sukuk defaults.

Findings

The authors analyses revealed that the VaR predictions were fairly consistent with the ratings provided by credit rating agencies, despite the limited tradability of Sukuk in the secondary market. The study was able to demonstrate that Sukuk is not riskier than conventional bonds in the Malaysian context.

Research limitations/implications

The research findings suggested that VaR values will depend on the fundamental value of a firm based on the considerations of market, credit and operational risk. It does not rely on the type of debt instrument, whether a Sukuk or conventional bonds.

Practical implications

The use of Sukuk along with conventional bonds as debt instruments creates opportunities for investors and bond issuers globally.

Originality/value

Although Sukuk has generated much interest among financial market players, studies are lacking on how to predict Sukuk defaults and whether Sukuk has the same risk profile compared to conventional bonds.

Keywords

Citation

Alam, N., Bhatti, M. and Wong, J.T.F. (2018), "Assessing Sukuk defaults using value-at-risk techniques", Managerial Finance, Vol. 44 No. 6, pp. 665-687. https://doi.org/10.1108/MF-05-2018-0218

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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