Abstract
This empirical study investigates the risk-adjusted performance metrics and liquidity premiums of sovereign Sukuk relative to conventional sovereign bonds across the Gulf Cooperation Council (GCC) capital markets over the period from 2012 to 2023. Utilizing daily pricing, yield, and bid-ask spread data from a comprehensive dataset of 142 sovereign debt instruments issued by Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Kuwait, and Oman, we evaluate Sharpe, Sortino, and Treynor ratios alongside dynamic GARCH-based volatility models. Additionally, secondary market liquidity differentials are quantified using the Amihud illiquidity metric and realized bid-ask spreads. Empirical results demonstrate that sovereign Sukuk exhibit statistically significant lower annualized return volatility and superior downside risk protection (higher Sortino ratios) compared to conventional bonds with matching maturities and credit ratings. However, sovereign Sukuk persistently trade with a liquidity premium, characterized by wider bid-ask spreads and lower secondary market turnover, primarily driven by institutional buy-and-hold mandates among Islamic financial institutions. Panel regression analysis reveals that while the yield spread differential between Sukuk and conventional bonds has narrowed over time, liquidity frictions remain the primary driver of yield disparities during periods of financial stress. These findings provide actionable insights for GCC sovereign debt management offices seeking to optimize issuance strategies, regulatory authorities aiming to enhance capital market liquidity, and institutional investors evaluating multi-asset ethical portfolios.
