Arbitrage outcome between conventional and Islamic finance of yield and forward rates in bond market

Mohd Yaziz Bin Mohd Isa, Mahalakshmi Suppiah
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Abstract

Purpose

In this research, arbitrage opportunity is tested between the yield rates computed by the NSS model, and the computed forward rates between conventional and Islamic finance to see any arbitrage opportunity. The research questions are the conventional and Islamic finance yields at the same level and equal to each other to avoid arbitrage? Whether conventional and Islamic forward rates differ significantly and thus create any arbitrage opportunity. This study aims to find the presence or absence of arbitrage between conventional and Islamic finance yield rates.

Design/methodology/approach

The NSS model is the latest model in calculating yield and forward rates. In the method the error level is minimized so expected yield rate and given yield rate both converged (Vahidin and Anastasios, 2020). When they converged it gives the researchers all six months’ yield rates. For the Nelson Siegal method, all the six months’ yield rates are available and these yield rates can be used to compute the forward rates.

Findings

The authors concluded there is a significant difference between the conventional yield rate and the Islamic yield rate. It suggests that because there are significant differences, its suggest arbitrage is possible. So anyone interested in making a guaranteed profit. The conventional yield rates are lower; hence, anyone can borrow from the conventional finance system and invest the money in the Islamic financial system because investments are getting higher rates of income in the form of yield rate in Islamic Finance. So, one can make money because of this difference. Statistically, it is possible to make money, but practically, the authors observed the difference, however it is very meager. The arbitrage opportunity between Islamic finance and conventional finance will not affect the economy because the significant difference is too small. The disturbance in the arbitrage opportunity due to the values is very meager and insignificant.

Research limitations/implications

This research does not address the derivative contracts’ role in risk management; future researchers could take up this as another research.

Practical implications

This research will be beneficial for financial institutions, especially institutional investors. Besides, this research will help the regulators and investment bankers in assisting where and future losses especially bond portfolios in conventional finance and Islamic finance. This study will also contribute and help the asset manager of mutual funds in the mutual fund industries.

Social implications

In effect, this research will strengthen the financial system, capital market and bond market, derivative contracts such as options contracts, futures contracts, swap contracts and forward contracts will use computed forward rates for assessing future losses (value at risk [VaR]) and to hedge them (Balakrishnan, 2020).

Originality/value

As this topic is rarely studied it will increase the literature present in this domain.

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债券市场收益率和远期利率的传统金融与伊斯兰金融之间的套利结果
研究目的 在本研究中,我们测试了由 NSS 模型计算出的收益率与计算出的传统金融和伊斯兰金融之间的远期利率之间的套利机会,以了解是否存在套利机会。研究问题是:传统金融和伊斯兰金融的收益率是否处于同一水平且彼此相等,以避免套利?传统金融和伊斯兰金融的远期利率是否存在显著差异,从而产生任何套利机会?本研究旨在发现传统金融和伊斯兰金融收益率之间是否存在套利。设计/方法/途径NSS 模型是计算收益率和远期利率的最新模型。在该方法中,误差水平最小化,因此预期收益率和给定收益率都趋于一致(Vahidin 和 Anastasios,2020 年)。收敛后,研究人员就能得到所有 6 个月的收益率。对于纳尔逊-西格尔法,所有六个月的收益率都可用,这些收益率可用于计算远期利率。这表明,由于存在显著差异,套利是可能的。因此,任何人都有兴趣获得有保障的利润。传统收益率较低;因此,任何人都可以从传统金融体系借钱,然后将钱投资到伊斯兰金融体系,因为在伊斯兰金融体系中,投资以收益率的形式获得更高的收益率。因此,人们可以利用这种差异赚钱。从统计学角度看,赚钱是可能的,但实际上,作者观察到的差异却非常微小。伊斯兰金融与传统金融之间的套利机会不会影响经济,因为两者之间的显著差异太小。研究局限/意义本研究没有涉及衍生品合约在风险管理中的作用,未来的研究人员可以将其作为另一项研究。此外,本研究还将有助于监管机构和投资银行家协助解决当前和未来的损失,尤其是传统金融和伊斯兰金融中的债券投资组合。社会影响实际上,这项研究将加强金融体系、资本市场和债券市场,期权合约、期货合约、掉期合约和远期合约等衍生品合约将使用计算出的远期利率来评估未来损失(风险价值 [VaR])并对冲损失(Balakrishnan,2020 年)。
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来源期刊
CiteScore
4.80
自引率
22.70%
发文量
78
期刊介绍: The journal provides a dynamic forum for the advancement of accounting and business knowledge based on Shari’ah and Islamic activities that have an impact on the welfare of society. JIABR publishes articles on the interplay between Islamic business ethics, accounting, auditing and governance, in promoting accountability, socio-economic justice (adl) and everlasting success (al-falah). It seeks to inform, among others, current theoretical and empirical research and practice in Islamic accounting, auditing and corporate governance, management of Islamic organizations, accounting regulation and policy for Islamic institutions, Shari’ah auditing and corporate governance, financial and non-financial performance measurement and disclosure in Islamic institutions and organizations. All styles of research, theoretical and empirical, case studies, practice-based papers and research notes that are well written and falling within the journal''s scope, are generally welcomed by the journal. Scope/Coverage Development of accounting, auditing and corporate governance concepts based on Shari’ah Socio-political influence on accounting and auditing regulation and policy making for Islamic financial institutions and organizations Historical perspectives on Islamic accounting, auditing and financial management Critical analysis on issues and challenges on accounting disclosure and measurement, Shari’ah audit and corporate governance Controls and risks in Islamic organizations Financial and non-financial performance measurement and disclosure.
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