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

Kris Boudt; Muhammad Wajid Raza; Dawood Ashraf

doi:10.1016/j.intfin.2019.01.001

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

Kris Boudt
, Muhammad Wajid Raza
, Dawood Ashraf^*

^*Corresponding author for this work

Econometrics and Data Science

Research output: Contribution to Journal › Article › Academic › peer-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 language	English
Pages (from-to)	252-266
Number of pages	15
Journal	Journal of International Financial Markets, Institutions and Money
Volume	60
Early online date	22 Jan 2019
DOIs	https://doi.org/10.1016/j.intfin.2019.01.001
Publication status	Published - May 2019

Funding

We would like to thank Professor Jonathan Batten, Dr. Barbara Marie L’Huillier, and Dr. Zamir Iqbal for their valuable feedback on an earlier draft. We also like to thank Shaheed Benazir Bhutto University Dir, Pakistan and the Higher Education Commission, Pakistan for providing financial support.

Funders
Shaheed Benazir Bhutto University
Higher Education Commission, Pakistan

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 17 Partnerships for the Goals

Keywords

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

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10.1016/j.intfin.2019.01.001

Macrofinancial regimes and performance of Shariahcompliant equity portfoliosFinal published version, 1.57 MBLicence: Article 25fa Dutch Copyright Act

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title = "Macro-financial regimes and performance of Shariah-compliant equity portfolios",

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.",

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AB - 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.

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KW - Low-risk weighting

KW - Market capitalization

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

Abstract

Funding

UN SDGs

Keywords

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