Revisiting the question of liquidity: are sukuk less liquid than conventional bonds?

Abstract

Purpose This study aims to provide one of the first empirical examinations of the liquidity conditions in the international sukuk market. It also provides evidence on how those differences have changed over time. Design/methodology/approach The study uses propensity score matching in combination with two price-based liquidity measures, bid-ask and high-low spreads, to compare the liquidity conditions of international sukuk issuances with similar international conventional bonds. Findings The results confirm that sukuk issuances are significantly less liquid than their conventional equivalents. The results also show that this difference in liquidity is more prominent in the case of corporate issuances. Finally, the analysis shows a general decline in these liquidity differences over time as the sukuk market matures and as more investors and issuers enter the market. Originality/value The study addresses the gap in the literature regarding the absence of an empirical examination of the liquidity conditions in the international sukuk market. The findings of this study also suggest that prior empirical findings regarding the diversification benefits offered by sukuk are likely to be driven by the lack of liquidity in the sukuk market rather than underlying economic factors.