Abstract
This paper investigates the impact of sovereign credit risk and global financial conditions on the dynamics of Sukuk spreads in the case of Saudi Arabia using Markov switching regression model. We consider sovereign credit default swap (CDS) premiums as a proxy for default risk and the Bloomberg Financial Conditions Index (BFCI) for the U.S. as a proxy for global financial conditions. The empirical results demonstrate that both sovereign credit risk and global financial conditions impact sukuk returns in the low and high volatility regimes.