Dynamic diversification benefits of Sukuk and conventional bonds for the financial performance of MENA region companies: empirical evidence from COVID-19 pandemic period

Abstract

Purpose This study aims to investigate the spillover between the Middle East and North Africa (MENA) stock index and several security indices, including Sukuk and conventional bond, and ultimately compare the hedge effectiveness of Sukuk and conventional bond. Design/methodology/approach The study uses VAR (1)-asymmetric Baba, Engle, Kraft and Kroner-multivariate generalized autoregressive conditional heteroskedasticity (1,1) model to analyze the volatility and shock and asymmetric shock spillover between Sukuk index and several bond indices in the MENA region including, Bond, All Bond, High Yield Bond and Bond and Sukuk and MENA stock market index and ultimately compare the hedging capabilities of Sukuk and conventional bonds by calculating the optimal portfolio weights for securities indices and stock portfolios and hedge effectiveness of security indices. Findings Results indicate that there is no shock, volatility and asymmetric shock spillover between the Sukuk index and MENA stock index, implying that Sukuk indices behave independently from MENA stock indices; however, there is shock and asymmetric shock spillover between MENA stock indices and security indices that include conventional bonds. The result of optimal portfolio weights and corresponding hedge effectiveness indicate that Sukuk is the most significant asset among other security indices in diversifying and hedging stock MENA portfolios. Moreover, the hedge effectiveness of Sukuk shows persistent trends during both the normal and crisis periods. Practical implications The study suggests that MENA stock market investors and investment managers should add Sukuk instead of the conventional bond to their portfolio to hedge their portfolio against investment risks during both normal and crisis periods. Originality/value Although many studies compare many aspects of Sukuk and conventional bonds, this is the first study that compares the hedge effectiveness of Sukuk and conventional bond based on the time-varying optimal portfolio weights strategy.