Journal of Islamic Financial Studies ISSN (2469-259X) J. Islam. Fin. Stud. 2, No.2 (Dec. 2016) http://journals.uob.edu.bh Does Greek Financial Crisis Affect Sukuk Markets? Experience from Gulf Countries Aldrin Herwany 1 , Erie Febrian 2 and Imam Buchari 3 1&2 Faculty of Economics & Business, Universitas Padjadjaran, Bandung, Indonesia 3 Faculty of Business Administration, University College of Bahrain, Manama, Bahrain Received: 12 Oct. 2016, Revised: 5 Nov. 2016, Accepted: 15 Nov. 2016, Published: 1 Dec. 2016 Abstract: Many studies have been carried out to investigate the impact of recent European fnancial crises on the performance of fnancial instruments in other regions. Nevertheless, there have been insuffcient studies explaining such impact on Islamic fnancial instruments. In particular, whether Greek Financial crisis have affected performance of Sukuk traded in Gulf Markets needs to be answered. This study is aimed at empirically investigating the causality of credit and liquidity risk on Sukuk Markets in Gulf economies in the period of Greek Financial Crisis (2010 to 2013). We analyzed the Sukuk data by employing Granger causality test, with all the associated vector auto- regression model procedures. To investigate different stages of the contagion impact, we carried out the analysis in three tests, i.e., using (i) full period data; (ii) pre-downturn data; and (iii) during-downturn data. Our fndings show that Bahrain sukuk market is cointegrated with those of Qatar and UAE in the full period observations. Meanwhile, during the crisis, Qatar Sukuk market is cointegrated with those of UAE and Bahrain. We also fnd that Bahrain Sukuk triggers market shock in both Qatar and UAE Sukuk markets. Bahrain consistently causes changes in price and spread of UAE Sukuk, both in the context of the full period and the during-crisis period. The reverse is also true. There has been strong tie between Bahrain and UAE Sukuk markets Keywords: Greek Financial crisis, Sukuk Markets, Gulf Countries 1. INTRODUCTION Some scholars, like Stiglitz [10], believe that the Greece’s fnancial crisis was a contagious impact from the US fnancial crisis. The crisis may have broadened to other regions outside Europe through similar process since fnancial products traded in the Greek market are also traded in other markets outside Europe, and investors have greater and easier opportunities to access overseas markets and form international portfolio. The nature of fnancial products and investor characteristics are, among others, factors that explained the smooth transmission of the calamity. There have been many studies, such as Pragidis, Aielli and Schizas [9], carried out to investigate the transmission of crisis from the USA to Greece and from Greece to other regions. Kenourgios, Naifar, and Dimitriou [5] investigated the contagion effects of the global fnancial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Nevertheless, there have been insuffcient studies done to explore the impact of the Greek fnancial crisis on other fnancial markets particularly Gulf countries. This study aims to fll this gap. To be more particular, this study intends to assess the contagious impact of Greek fnancial crisis to Gulf market, especially in Sukuk markets. We propose an assessment of the contagion issue using data of Islamic fnancial/capital products, i.e., Sukuk, since this product is deemed to be shariah-compliant and therefore may be relatively immune to the impact of fnancial shocks [14]. Email: aldrin.herwany@fe.unpad.ac.id, erie_febrian@fe.unpad.acid, ibuchari@ucb.edu.bh