Interest free financial instruments and investigating the long term co- movements between conventional financial instruments

In the late of 2011, new financial instruments which is called lease certificate or the common global name sukuk, has been introduced to Turkish financial market. Undoubtedly, new variety of financial instruments and services are beneficial in terms of market depth and utility. Sukuk market receives many attention from institutional investors and asset managers due to high returns, lower correlation and growth potentiality. In this paper, we contribute to the on-going discussion on whether sukuk markets provide international diversification benefits for conventional fixed income portfolio investor. To proxy international sukuk and bond portfolio, we use FTSE fixed income indexes. In empirically modelling we utilise both Engle- Granger and Johansen co-integration method to investigate long term co-movement. We also employ Vector Error Correction Model for further investigation to see the power of relationship between indexes. We observe that, International Sukuk Index provide international diversification benefits for most of the other fixed income portfolio indexes.