Macro-financial regimes and performance of Shariah-compliant equity portfolios

Kris Boudt, Muhammad Wajid Raza, Dawood Ashraf*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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Abstract

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.

Original languageEnglish
Pages (from-to)252-266
Number of pages15
JournalJournal of International Financial Markets, Institutions and Money
Volume60
Early online date22 Jan 2019
DOIs
Publication statusPublished - May 2019

Keywords

  • Equal-weighting
  • Fundamental-weighting
  • Low-risk weighting
  • Market capitalization
  • Shariah-compliant investing

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