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Transition and physical climate risk spillovers in Sukuk and ESG Sukuk: Frequency evidence from Malaysia

Author

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  • Alqaralleh, Huthaifa
  • Baalbaki, Chadi
  • Chehade, Imad

Abstract

This paper examines how climate risk transmits across Islamic fixed-income markets by studying daily Malaysian Sukuk and ESG Sukuk indices from 3 January 2020 to 26 July 2025. Malaysia is used because it is the only market in our dataset with sufficiently continuous daily pricing for both segments, enabling like-for-like comparison. Climate risk is decomposed into transition (TRI) and physical (PRI) components. Using wavelet coherence and MODWT-based frequency connectedness within a rolling TVP-VAR framework, we show pronounced horizon dependence. ESG Sukuk acts as a net transmitter at short and medium horizons, while TRI and PRI become dominant net transmitters in the long horizon, consistent with slower climate-risk repricing and portfolio reallocation channels. The framework is portable to other markets as data coverage expands.

Suggested Citation

  • Alqaralleh, Huthaifa & Baalbaki, Chadi & Chehade, Imad, 2026. "Transition and physical climate risk spillovers in Sukuk and ESG Sukuk: Frequency evidence from Malaysia," Finance Research Letters, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:finlet:v:103:y:2026:i:c:s1544612326006525
    DOI: 10.1016/j.frl.2026.110124
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