Sukuk are financial instruments similar to bonds that are compliant with Shari’ah (Islamic law). Since their inception in 2002, sukuk markets have experienced dramatic growth rates, attracting the attention of investors, analysts, and researchers alike. Despite Islamic bonds (thereafter termed sukuk) successfully holding their place in the international bond markets, this dissertation’s literature survey reveals that few empirical studies have undertaken a risk analysis of sukuk markets from the investors’ perspectives. Conventional bonds and sukuk as financial instruments are both exposed to various types of financial and market risks. This dissertation’s purpose is to engage in a risk analysis of sukuk markets compared with conventional bonds. Using a value at risk (VaR) approach, we examine whether sukuk are exposed to higher market risks than conventional bonds. In addition, we investigate whether the inclusion of sukuk in investment portfolios provides a diversification benefit to individual investors. We find that, for a given issuer, a conventional bonds’ VaR is significantly higher than that of sukuk, indicating that sukuk are less risky. We also find evidence of persistent sukuk illiquidity. We further show that introducing a sukuk allocation to a bond portfolio improves the risk–return trade-off. This dissertation’s findings have important policy implications for investors and Islamic bond issuers. Moreover, they are of particular importance to policy makers
