Religious Frictions on the Capital Markets

Sammanfattning: The Malaysian government strives to establish an Islamic capital market in synchrony with the conventional market. Looking at conventional bonds and sukuk (Islamic bonds) issued by the same entity (Government of Malaysia), denominated in the same currency and traded on the same trading platform we find a statistically significant price deviation for short and medium term maturities. We construct and compare zero yield curves for both markets as well as use the conventional yield curve to estimate the issue specific price deviation of a sukuk. This paper argues that the frictions in part can be explained by illiquidity issues and finds that the proportions of zero returns has some explanatory power on the yield spread.