Sukuk vs. Eurobonds: Is There a Difference in Value-at-Risk?

IMF Working Papers, October 1, 2007

Source details

Objective: Assess the impact of bonds issued according to Islamic principles (Sukuk) on the cost and risk structure of investment portfolios using the Value-at-Risk (VaR) framework.
Market context: The market for Sukuk has grown tremendously in recent years at about 45 percent a year.
Institutional relevance: Sukuk provide sovereign governments and corporations with access to the huge and growing Islamic liquidity pool, in addition to the conventional investor base.

Comparative focus: Secondary market behavior of Eurobonds and Sukuk issued by the same issuer.
VaR methodologies employed:
- Delta-normal method.
- Monte-Carlo simulation methods.

Diversification gains:
- The analysis implies gains from diversification when combining Sukuk and Eurobonds.
- In certain cases, these gains are described as very significant.
Risk and cost implications:
- Sukuk affect the cost and risk structure of investment portfolios as measured via VaR metrics (details of quantitative magnitudes and statistical tests are in the full working paper).

Portfolio construction:
- Consider including Sukuk alongside Eurobonds issued by the same sovereign or corporate issuer to capture potential VaR-reducing diversification benefits.
Market access:
- Issuers can broaden their investor base by tapping both the Islamic liquidity pool and conventional investors via Sukuk issuance.
Risk management:
- VaR analysis using both delta-normal and Monte-Carlo approaches can reveal scenario-dependent diversification benefits; use both methods to inform risk limits and capital allocation.

Source: IMF Working Papers — "Sukuk vs. Eurobonds: Is There a Difference in Value-at-Risk?" by Faezeh Raei and Selim Cakir, October 1, 2007.