The Time-Varying Causality Relationship between Sukuk, BIST Sustainability Index and Government Bonds: The Case of Turkey

In financial markets, some investors consider not only basic functions such as return and hedging, but also normative dimensions such as faith, ethics, environmental impact and responsible investment principles. In the process of portfolio construction, investors' asset choices are complicated by their concerns regarding risk-return preferences on the one hand and their beliefs or responsible investment principles on the other. In this context, this study investigates the time-varying causality relationship between the Borsa Istanbul (BIST) sustainability index, government-issued lease certificates (sukuk) and 10-year government bonds (government bonds) traded as financial instruments in Turkey. In addition, it highlights the commonalities between sustainable finance and Islamic finance, and emphasizes that investors who base socially responsible investment principles can increase their asset choices. These contributions constitute the importance of the study. The data used in the empirical analysis are daily data covering 2016-2020. According to the findings, a bidirectional time-varying Granger causality relationship is found between the BIST sustainability index and sukuk, a unidirectional Granger causality relationship between BIST sustainability index and government bonds (from the BIST sustainability Index to government bonds), and a bidirectional time-varying Granger causality relationship between government bonds and sukuk. Accordingly, the dynamic relationship between these assets is expected to provide useful information to investors when making price predictions.