Abstract
The study addresses the question “How do the financial markets perceive and price internationally issued Islamic bonds?” It is examined by empirically testing for the evidence of co-integration of sukuk yields with the US Treasury yields using Vector Error Correction (VEC) models. Our results indicate that the sukuk yields are highly co-integrated with the US Treasury yields in long-term relationships. The short-term dynamics of the sukuk yields with the interest rate series is, however, complex showing bi-directional influences. We infer that the international financial markets are viewing and pricing sukuk in a manner similar to that for the conventional bonds.