Switching spillovers and connectedness between Sukuk and Islamic stock markets

Islamic finance experiences a spectacular growth in the last two decades. The World, Asian, and Europe Islamic stock markets represent a benchmark for investors interested by these assets. The Dow Jones Sukuk markets is a reference Islamic bond for international investors. According to the 2020 Islamic Finance Development Report, the value of global Islamic finance assets increases from 2.88 trillion USD in 2019 to 3.69 trillion USD in 2024. On the other hand, the behavior of market actors depends on the price movements. The market experiences phases of upside and downside which lead to different investor?s expectations and anticipations. Therefore, relying on market volatility regime is fundamental to optimize the funds allocations and portfolio risk management. This research proposal aims to examine the switching spillover effects between Dow Jones Sukuk and global and two regional Islamic stock markets (World, Asia, and Europe). More precisely, we will investigate dynamic spillovers and between the markets under study during low-volatility and high-volatility regimes. On the other hand, we will conduct a portfolio analysis by building a risk-minimizing portfolio composed by Sukuk and Islamic stock security and quantifying the optimal weights and hedge ratios under both volatility regimes. Finally, we analyse Sukuk's ability to reduce downside risk in high- and low-volatility regimes using Value at Risk (VaR) and Expected Shortfall (ES) risk metrics. This research will provide significant practical implications to retail and institutional investors, portfolio managers as well as policymakers. This study will be informative for policymakers to promote the stability and the development of Islamic financial markets.