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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