Avoiding Interest-Based Revenues while Constructing Shariah-Compliant Portfolios: False Negatives and False Positives

Ozgur Arslan-Ayaydin, K.M.R. Boudt, Muhammad Wajid Raza

    Research output: Contribution to JournalArticleAcademicpeer-review

    Abstract

    Shariah law prohibits investments in equities of companies for which interest income is a considerable source of revenue. In practice, this is often enforced by prohibiting investments in firms for which the reported interest-based revenues exceed a predetermined percentage of the firm’s total revenue. In this article, the authors investigate an alternative approach that consists of avoiding firms that are expected to have interest-based revenues exceeding the acceptable threshold over the investment horizon. They compare the traditional backward-looking approach with the proposed forward-looking analysis for a sample of S&P 500 firms over the period 1984–2015. Their results show that the forward-looking approach outperforms the backward-looking approach in terms of both fewer false positives (firms classified as compliant when they are not) and false negatives (firms classified as not compliant when they are).
    Original languageEnglish
    Pages (from-to)136-143
    Number of pages8
    JournalThe Journal of Portfolio Management
    Volume44
    Issue number5
    DOIs
    Publication statusPublished - May 2018

    Keywords

    • Portfolio
    • Shariah
    • screening

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