Title: Sukuk spreads determinants and pricing model methodology

Authors: Nader Naifar; Slim Mseddi

Addresses: Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh, Saudi Arabia ' Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh, Saudi Arabia

Abstract: The investment concept of sukuk was created as an alternative to conventional bonds since interest-bearing instruments are prohibited under Islamic law. Sukuk (commonly referred to Islamic bonds) represent a proportional ownership of tangible assets or a pool of assets. However, the key to understanding these instruments as a financial innovation is to focus on their pricing and risk characteristics. The challenge for sukuk issuing entities becomes to provide an efficient pricing model, which is compliant with Islamic law principles. The aims of this paper are two-fold. Firstly, we explore empirically the determinants of sukuk yield spreads and we describe within a coherent empirical framework the economic implications of the links between sukuk yield spreads, stock market conditions and macroeconomic variables; Secondly, we provide a methodology for estimating the fair price of sukuk in the presence of default risk. This paper presents the first empirical study for the determinants of sukuk spreads using available data and it has several practical implications that are of value for investors, risk managers and the development of Islamic financial markets.

Keywords: Islamic finance; sukuk structure; sukuk yield spreads; stock markets; macroeconomic variables; default risk; real estate; Islamic bonds; financial innovation; pricing models.

DOI: 10.1504/AAJFA.2013.054425

Afro-Asian Journal of Finance and Accounting, 2013 Vol.3 No.3, pp.241 - 257

Received: 28 Mar 2012
Accepted: 11 Jul 2012

Published online: 28 Jun 2014 *

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