Forecasting Volatility of Sukuk Price Return with Markov-Switching GARCH (Case Study: Franklin Global Sukuk Fund Luxembourg)
Chandrawati (a*), Irhamah (a), Nur Iriawan (a)

a) Department of Statistics, Institut Teknologi Sepuluh Nopember (ITS), Sukolilo, 60111, Indonesia.
*chandrawatimtk[at]gmail.com

Abstract

Volatility is a variance that changes over time. Volatility in an investment is defined as a measure of the risk associated with a portfolio based on price changes, therefore volatility is one of the most important risk indicators for Islamic financial market players and observers. One of the Islamic financial market products is sukuk. Sukuk or sharia bonds are certificates with the same value representing the full ownership of the basic assets, benefits and services of a project or special investment activity. Changes in sukuk prices have an impact on sukuk returns, hence good management is needed for sukuk investors to get the expected return. Franklin Global Sukuk Fund is a sukuk is a sukuk issued by the state of Luxembourg. The time series data on the Franklin Global Sukuk Fund undergoes a structural change in the volatility shift of the sukuk return, hence an appropriate model is needed to describe it. The research will predict the volatility of sukuk returns with the model Markov-Switching GARCH. MSGARCH can analyze structural changes and shifts in the volatility of sukuk returns and predict volatility for future periods. Thus, the best Markov-Switching GARCH model will be estimated by Bayesian method, namely Markov Chain Monte Carlo (MCMC) and Hamiltonian Monte Carlo (HMC).

Keywords: HMC, MCMC, MSGARCH, Sukuk, Volatility

Topic: Mathematics and Statistics