This study proposes the Markov Regime Driven Style allocation (MRDS) strategy for Shariah-compliant portfolio construction, a forward-looking methodology that merges economic forecasting with Shariah-compliant investment principles. By using Shariah-compliant equities from the S&P 500 universe over the period 1986–2016, we find that a Shariah-compliant investor can achieve stable performance by dynamically allocating across investment styles determined from the macro-financial information, as compared with various single style strategies. The MRDS improves both the level and stability of relative performance. This strategy also successfully mitigates risk by reducing volatility, value-at-risk, and portfolio drawdowns.
|Number of pages||15|
|Journal||Journal of International Financial Markets, Institutions and Money|
|Early online date||22 Jan 2019|
|Publication status||Published - May 2019|
- Low-risk weighting
- Market capitalization
- Shariah-compliant investing