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Comparison of Portfolio Selection and Performance: Shari’ah-Compliant and Socially Responsible Investment Portfolios


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This study examines the effect of Islamic screening criteria on Shari’ah-compliant portfolio selection and performance compared to Socially Responsible Investment (SRI) portfolio. Each portfolio constructed from 15 stocks based on FTSE 100 using data from year 1997. Mean-variance portfolio optimization is employed with some financial ratios added as constraints for the Shari’ah portfolio. Annual expected return of each portfolio from 2008 to 2013 is used to calculate Sharpe’s ratio, Treynor ratio and Jensen’s alpha as the performance measurement tools. Macroeconomic variables are assessed using ordinary least square to examine whether they influence the portfolios’ expected returns or not. The result finds that Shari’ah portfolio has a better performance than SRI from year 2008 to 2010 shown by higher value of the measurement tools. However, from 2011 to 2013, SRI portfolio has better performance than Shari’ah portfolio.
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Comparison of Portfolio Selection and Performance:
Shari’ah-Compliant and Socially Responsible
Investment Portfolios
Mehmet Asutay* and Nur Dhani Hendranastiti**
Durham University, UK
This study examines the effect of Islamic screening criteria on Shari’ah-compliant portfolio selec-
tion and performance compared to Socially Responsible Investment (SRI) portfolio. Each portfolio
constructed from 15 stocks based on FTSE 100 using data from year 1997. Mean-variance portfolio
optimization is employed with some nancial ratios added as constraints for the Shari’ah portfo-
lio. Annual expected return of each portfolio from 2008 to 2013 is used to calculate Sharpe’s ratio,
Treynor ratio and Jensen’s alpha as the performance measurement tools. Macroeconomic variables
are assessed using ordinary least square to examine whether they inuence the portfolios’ expected
returns or not. The result nds that Shari’ah portfolio has a better performance than SRI from year
2008 to 2010 shown by higher value of the measurement tools. However, from 2011 to 2013, SRI port-
folio has better performance than Shari’ah portfolio.
Keywords: Islamic screening criteria, Shari’ah portfolio, SRI portfolio, portfolio performance, mac-
roeconomic variables
Portfolio optimisation remains an important
research area, which has essential consequenc-
es for the practice of it. Theoretically, Markow-
itz (1952) suggests that portfolio optimization
should be determined by mean-variance theory.
Investors will choose asset with higher risk as
long as it is compensated with higher return.
However, investors who consider about invest-
ing in Shari’ah-compliant assets would like to
have an alternative for their investment that
could full Islamic nance principles. The ris-
ing awareness from investors about Shari’ah-
compliant investment and also development
of Islamic nance led to the establishment
of Shari’ah screening processes for assets to
be classied as Shari’ah-compliant assets or
stocks; Dow Jones, S&P, and FTSE established
the Islamic screening criteria and Islamic indi-
ces as guidance for investors to participate in
capital market that complies with their belief.
For assets to be classied as shari’ah-com-
pliant, the assets have to go through screening
process. There are two types of Shari’ah screen-
ing processes: qualitative and quantitative cri-
teria (Derigs & Marzban, 2008). The qualita-
tive criteria is related to the type of products
and business the company engaged with, while
quantitative criteria related to the proportion of
asset, liabilities, equity, and revenues in the bal-
ance sheet and income statement. The former
does not relatively change over time, since it
needs planning and management to change the
products sold by company. Another portfolio
investment that does not only consider about
mean-variance is Socially Responsible Invest-
ment (SRI). There are some requirements to
* Faculty Member, Durham University, UK.
**Graduate Student of Durham University, UK. E-mail:
be fullled for a stock to be classied as SRI
stocks. The difference from Shari’ah-compli-
ant stocks is that SRI does not have quantitative
criteria to be fullled.
This research aims to examine the effect
of additional requirements other than mean-
variance theory in Islamic portfolio selection
and performance. In doing so, this study ex-
amines Islamic portfolio by comparing with
SRI portfolio selection and performance,
which then examining the macroeconomic
variables’ effect on portfolio return.
Literature Review
Islamic nance has unique characteristics
in conducting business transactions. Two of
the main principles are to avoid riba and gha-
rar (Kahf, 2009). The prohibition of riba and
gharar affects the operation of capital markets,
and therefore, investors who want to invest in
capital market without violating Shari’ah prin-
ciples need guidance to participate in invest-
ment. Thus, Shari’ah scholars develop Islamic
screening criteria for investing in capital mar-
ket, especially investing in stocks.
As mentioned, Islamic screening criteria
consist of two types, qualitative and quantitative
criteria. The qualitative criteria are that compa-
nies should not be involved in money-lending
and interest transactions, such as banks and in-
surance companies (Ghoul & Karam, 2007).
Other criteria are that the companies should not
involve in the production, distribution, and/or
proting from alcohol, pornography, tobacco,
gambling, weapons, music, entertainment, pro-
cessing pork meat or non-halal meat, hotels, and
airlines which serve alcohol on their premises.
However, there are different requirements
for the quantitative criteria depending on the
institutions issuing the criteria (Derigs & Marz-
ban, 2008). The quantitative criteria are related
to liquidity ratio, interest ratio, debt ratio, and
non-permissible ratio.
As for SRI, it is initially based on religious
reasoning, for example the prohibition of usury
from Christianity and Islam. However, as the
time and knowledge evolves, modern SRI is more
based on the varying personal ethical and social
beliefs of individual investors (Renneboog et al.,
2008). First modern SRI is the Pax World Fund
established 1971 in United States, which aims for
investors who are opposed to Vietnam War.
The SRI screening criteria is divided into
positive and negative. The positive screening
is that investing in company which has strong
labour relations and workplace conditions, in-
volves in recycling, waste reduction, and envi-
ronmental clean-up, concerns about sustaina-
bility, employment diversity, renewable energy,
biotechnology, and community involvement.
On the other hand, the negative screening
results imply that investors should not con-
sider investing in companies which involve in
tobacco, alcohol, gambling, defence/weapons,
irresponsible foreign operations, antitrust vio-
lations, consumer fraud, marketing scandals,
human rights violation, animal testing, devel-
opment of genetic engineering for agricultural
applications, insurance for non-married cou-
ples, healthcare, interest-based nancial insti-
tutions, and pork producers.
To construct portfolio, Markowitz (1952)
introduces the mean-variance optimization for
nding the optimal portfolio. The optimization
problem is solved by minimizing variance of
the portfolio subject to certain expected port-
folio return and the sum of the assets weight
is equal to one. Non-negativity constraint could
be imposed if short sale is not allowed.
There could be many efcient portfolios
according to the expected portfolio return de-
termined. Those portfolios could form efcient
frontier line, as investors decide the portfolio
to invest by maximizing their utility function.
The optimal portfolio is located in the tangent
point between efcient frontier and indiffer-
ence curve formed from the utility function.
Derigs & Marzban (2009) develops the
mean-variance theory by imposing nancial
ratio requirements, as constraints to adjust for
the quantitative Islamic screening criteria. In
addition, Hazny et al. (2011) develops mean-
variance under Islamic framework by imposing
income cleansing or purication to the equation
of portfolio’s expected return and standard de-
One way to evaluate portfolio performance
is by examining the rate of return and compar-
ing it with other portfolios, which have similar
characteristics. However, this could be better if
the return is adjusted to risk so that the port-
Asutay and Hendranastiti
folios are truly comparable. The risk-adjusted
return portfolio performance measurements are
Sharpe’s ratio, Treynor ratio, and Jensen’s al-
pha (Bodie et al., 2009).
In addition, using different kind of dataset,
prior studies show different results. For exam-
ple, Hashim (2008) also nds that Islamic index
has better performance than SRI index. How-
ever, Girard & Hassan (2008) nd that there is
no different performance between Islamic and
non-Islamic index. Moreover they nd that
there is similar reward to risk and diversica-
tion benet for both portfolios. Lastly, Hazny
et al. (2011) nd that the efcient frontier of
Islamic portfolio outperforms for low risk, but
underperforms for high risk.
Research Method
The dataset contains data from 101 com-
panies listed in London Stock Exchange and
included in FTSE 100. The monthly adjusted
stock prices, annual UK interbank 6-month
(risk-free rate of return), FTSE 100 price in-
dex (market return), income statement, and
balance sheet are generated from Datastream.
The use of 6-month UK interbank does not
violate shari’ah clauses as long as the basic
requirements are being complied, for exam-
ple the screening for shari’ah stocks (Ayub,
2007). In addition, the data for annual in-
terest income and interest expense are taken
from Bloomberg.
Monthly stock prices are generated from
January 1997 up to December 2007 to calcu-
late return employed for portfolio construction.
Then annual nancial ratios calculated from
income statement and balance sheet informa-
tion are applied for constraints in the Shari’ah
portfolio optimization. Moreover, stock prices
at the end of the year of 2008 until 2013 are
used to evaluate the portfolio performance. The
period of the study includes the time of crisis so
that its effect could be examined.
Table 1. Summary Statistics
Share Prices' Returns Mean Std. Dev. Minimum Maximum
Asutay and Hendranastiti
For this study, two portfolios are con-
structed: Shari’ah and SRI portfolio. Qualita-
tive screening criteria based on FTSE Shariah
Global Equity Index Series Ground Rules are
used to determine stocks included in Shari’ah
portfolio, while FTSE4Good Index Inclusion
Criteria are employed to determine stocks be-
longing to SRI portfolio. For the SRI portfolio,
companies classied as having risk level of 3
for environmental management are excluded.
After employing qualitative screening
criteria, the next requirements are examined.
Companies which do not have stock price
starting January 1997 and annual report end-
ing in December are excluded. As a result, 21
stocks for Shari’ah portfolio and 50 stocks for
SRI portfolio remained. To construct portfo-
lio, 15 stocks were considered to be included
in each type of portfolio. For Shari’ah portfo-
lio, those 21 stocks divided into 3 parts based
on market capitalisation: small, medium, and
large capitalisation and 5 stocks selected from
each category. For SRI portfolio, companies
which are classied as risk level 1 are selected
rst then followed by the risk level 2 compa-
nies. Table 3.1 shows the list of the stocks.
Markowitz (1952) introduces the mean-
variance theory to construct portfolio optimiza-
tion. It is argued that mean or expected return is
desirable by investors, while variance of return
is not desired by investors. Moreover, the ob-
jective and constraints in constructing the port-
folio are shown in equations from (1) to (4).
Min Variance =XiXj
Subject to:
Expectedreturn =Xi
n 4)
where Xi is weight of asset i
i is the return
of asset i, and
ij is covariance between asset
i and asset j.
Derigs & Marzban (2009), as an extension,
impose quantitative criteria of Islamic screen-
ing as constraints in constructing portfolio opti-
mization shown in equation (5) to (9).
ri=financial ratio
T=permissible threshold
Xi=0if ri(g)>T(g)
if it is compliant
Thus, the additional constraints are:
The next step is determining different val-
ues of expected return so that there are many
portfolios, which then construct minimum-var-
iance set line. The line above minimum global
variance is known as efcient frontier since
it has higher return for the same risk. Having
the efcient frontier, indifference curve should
be drawn to determine the optimal portfolio,
which is the intersection point between those
two curves. This procedure is repeated for the
following years to determine the portfolio com-
position and examine the performance.
In this research, nancial ratios established
by FTSE are used, since it has more require-
ments than other institutions and it uses total
assets as denominator rather than market val-
ue which represent the true value of company.
After constructing the portfolio optimization,
the portfolio performance is examined. There
are three portfolio performance measurements
used: Sharpe’s ratio, Treynor ratio and Jens-
en’s alpha. The reason of using these ratios for
measuring shari’ah portfolio performance is the
same as using 6-month UK interbank rate for
the risk-free rate of return mentioned before.
Sharpe’s ratio indicates that portfolio with
higher ratio value has higher excess return by
having the same risk meaning that this portfolio
has better performance. Treynor ratio indicates
that portfolio with higher ratio value has higher
excess return by having the same systematic
risk meaning that this portfolio has better perfor-
mance. As for Jensen’s alpha, portfolio which has
positive Jensen’s alpha indicates that this portfolio
could generate abnormal return compared to re-
turn calculated using Capital Asset Pricing Model
(CAPM) assuming that CAPM holds.
Macroeconomic variables could be ex-
amined whether they have any effect on the
portfolio return or not. Based on the previous
studies, multiple regression using Arbitrage
Pricing Theory (APT) with ordinary least
square procedure could be used to examine
the macroeconomic effects (Brooks, 2002).
Table 2 explains the variables and their de-
Result and Discussion
In constructing the portfolio optimization,
expected return and covariance matrix of the
assets are estimated using historical data. The
rst portfolio is constructed at the end of year
2007 by using historical data from January
1997 until December 2007.
After calculating the expected return and
covariance of the assets in the previous sec-
tion, optimal portfolio could be obtained.
The next procedure in the analysis is to draw
Table 2. Macroeconomic Variables and Denition
Variable Denition Calculation
rshar Shari'ah portfolio return
rshar =Xi
rsri SRI portfolio return
rsri =Xi
dInd Change in Industrial production
index dIndt=IndtIndt
dExch Change in Exchange rate (£/$) dExch
dUnemp Change in Unemployment rate
dTerm Change in Term structure
dInation Change in Ination
dM1 Change in Money supply dM
dOil Change in Crude oil price dOilt=In
Notes: LTGB is Long-term Government Bond, CPI is Consumer Price Index
minimum-variance set, which contains opti-
mal portfolios. After obtaining the efcient
frontier, indifference curve is required to de-
termine the portfolio preferred by investors.
Having all the data, optimal portfolio, which
is preferred by investors could be determined.
Since the nancial ratios change every year,
it is required to evaluate the portfolio composi-
tion annually for Shari’ah portfolio. In addition,
the SRI portfolio is also evaluated annually by
this study to examine the different composition
with Shari’ah portfolio. The procedure of port-
folio optimization is conducted by obtaining the
minimum-variance set, through which establish-
ing efcient frontier, leading to the estimation of
utility function and indifference curve. This pro-
cess is repeated from year 2008 to 2012.
There is optimal portfolio each year for
both Shari’ah and SRI portfolios. These
portfolios are constructed from 15 assets,
which then due to the optimization require-
ments, the portfolios consist of smaller
Asutay and Hendranastiti
number of assets with its percentage. Figure
1 shows assets composition of the Shari’ah
portfolio, while figure 2 demonstrates the
assets composition of SRI portfolio.
Figure 1 shows the different portfolio com-
position in every year. In year 2008, WEIR is
Figure 1. Portfolio CompositionShari’ah
Figure 2. Portfolio Composition – SRI
not included in the portfolio, because the ratio
for interest expense and interest income ex-
ceeded the threshold. Moreover, SHP is also ex-
cluded, because it had debt ratio higher than the
required value. As can be seen, for year 2009,
WEIR is included in the portfolio again, be-
cause the interest expense and interest income
ratios did not exceed the threshold. This is also
true for SHP, which the debt ratio did not sur-
pass the required value. In addition, there are
two stocks, BNZL and SN, included in portfo-
lio after the two previous years, had debt ratio
higher than the required.
It should be noted that in year 2010, ANTO
becomes part of portfolio after three years of
absence, as it had cash and short-term invest-
ment to total asset ratio higher than the thresh-
old. In year 2012, TLW is included after the
four previous years, as it had interest expense
to total revenue higher than the required value.
Figure 2 shows that the SRI portfolio com-
position tends to be stable for ve years. There
is only change in composition for WEIR and
PSN in certain years because when they have
the lowest return among all assets, they will not
be included in the portfolio.
The next procedure is to examine Sharpe’s
ratio, Treynor ratio and Jensen’s alpha since
they are risk-adjusted performance measure-
ment. To calculate these ratios, monthly port-
folio return, market return (FTSE100 return),
and risk-free rate of return (6-month LIBOR)
are needed. Having the data, annual ratio is cal-
culated to evaluate the portfolio performance,
which can be found in Table 3.
Table 3 shows that Shari’ah portfolio has beta
value greater than 1 for year 2008, 2011, 2012,
and 2013 meaning that this portfolio has higher
Table 3. Portfolio Performance
Portfolio Performance
2008 2009 2010 2011 2012 2013
Expected return
Standard Deviation
Sharpe's Ratio
Treynor Ratio
Jensen's Alpha
Expected return
Standard Deviation
Sharpe's Ratio
Treynor Ratio
Jensen's Alpha
volatility than market. However, SRI portfolio al-
ways has beta value less than one meaning that this
portfolio has less volatility than market. Moreo-
ver, both portfolios have negative expected return
for year 2008, which then begins to increase for
the next years. However, Shari’ah portfolio has
negative expected return again in year 2012.
Table 3 also shows that Shari’ah portfo-
lio has higher risk than SRI in 2008, shown
by the standard deviation. However, Shari’ah
portfolio has lower risk than SRI portfolio for
year 2009 and 2010 even though it turns to be
higher again in the following three years. Ta-
ble 3 also explains that both Shari’ah and SRI
portfolios have negative value for Sharpe’s
ratio in year 2008 due to the negative value
of expected return from each portfolio. In ad-
dition, as can be seen, Shari’ah portfolio per-
forms better than SRI portfolio in year 2008,
2009, and 2010, because having higher value
for Sharpe’s ratio means that Shari’ah portfo-
lio has higher additional return for adding one
unit of total risk. However, it has a decreasing
value in year 2011 and 2012, far lower than the
SRI portfolio performance. It increases in year
2013, but not as high as the SRI ratio.
As for Treynor ratio, Shari’ah portfolio per-
forms better than SRI portfolio in year 2008,
2009 and 2010, because it has higher value of
Treynor ratio meaning that Shari’ah portfolio
has higher additional return for adding one unit
systematic risk. However, its value decreases in
Asutay and Hendranastiti
2011 followed in 2012 even though it bounces
back in 2013. Meanwhile, SRI portfolio has a
relatively stable value for Treynor ratio for ve
years, although it has experienced decrease be-
tween 2009 and 2011.
As for Jensen’s alpha, both Shari’ah and
SRI portfolios have positive alpha meaning
that there is excess return that is not anticipat-
ed by the systematic risk. From 2008 to 2011,
Shari’ah portfolio has higher Jensen’s alpha
than SRI portfolio, but it decreases very steeply
in year 2012 even though it bounces back in
year 2013. On the other hand, SRI portfolio has
relatively positive stable value of Jensen’s al-
pha for six years.
In overall, Shari’ah portfolio performs bet-
ter in year 2008 until 2011, but it has the low
value of ratios in year 2012. Looking at the ta-
ble 3, due to having negative expected return
in 2012, it has low performance. This low per-
formance could be due to the stocks composing
the portfolio. Based on the gure 1, the stocks
included are BNZL, PSN, SHP, TLW, SN, AZN,
BG, and RIO.
The assets SHP, TLW, AZN, and BG have
decreasing price trend from year 2011 to 2012.
The decreasing trend means that those assets
have negative rate of return in 2012. Thus, it
contributes to the fact that the portfolio return
is negative. In oil sector, TLW and BG’s per-
formances were hampered as the oil prices fell
gradually from May to November 2012 (Sjolin,
The fall in 2012 preceded by decrease in
2011, which is not caused by negative value of
portfolio’s expected return like in year 2012.
Based on the information in gure 2, the port-
folio composition in 2011 consists of WEIR,
Lastly, Shari’ah portfolio has demonstrated
a better performance in 2008, 2009 and 2010,
because some of the stocks in the portfolio have
a good performance on those years. The annual
composition of stocks is depicted in gure 1.
RIO had an increase in share prices because
there was an increase in gold and copper futures
prices (Turner, 2010).
According to the analysis above, it seems
that macroeconomic variables, such as oil price,
have an effect on the return of stock prices.
Since these companies work within the larger
macroeonomic conditions, it is very normal
that they are affected by the developments in
macroeconomy. To examine such effects, mul-
tiple regression method using Arbitrage Pric-
ing Model (APT) is utilised with ordinary least
square regression procedure by ensuring that
there is no multicollinearity, autocorrelation,
and heteroskedasticity (Brooks, 2002). Table 2
explains the variables and their relevant deni-
tions. The regression starts by calculating the
variables and the lagged variables, as they may
have an effect on the return.
The result shows that Shari’ah portfolio
return at time t is affected by change in oil
price at time t, change in ination at time t and
change in industrial production at the previous
period. The coefcients imply that 1% change
in oil prices will lead to 16.45% increase in
Shari’ah portfolio return, 1% change in ina-
tion will lead to 249.39% increase in the return
and 1% change in industrial production index
in the previous period leads to 1.04% increase
in return.
The positive effect of oil price could be
because some stocks in Shari’ah portfolio are
oil companies, which implies that if the oil
price decreases then the companies have low-
er revenue and it might affect the share pric-
es. Moreover, investing in stocks is one way
to hedge ination meaning that if the prices
decrease then people tend to invest in stocks,
vice versa (Chen et al., 1986). However, the
result shows that the relationship is positive
and signicant. It could indicate that inves-
tors presume that they will buy more stocks
since ination increases meaning that there
is an increase in nominal value of the com-
panies and their revenue. The positive sign
of change in industrial production index is
based on that returns are based on the future
cash ow, which depends on future economic
conditions (Bilson et al., 2001). The result is
supported by James et al. (1985) who report
that current stock returns are related to indus-
trial production lagged by 2 months.
Moreover, the result also explains that SRI
portfolio return is only inuenced by change in
oil price at time t. The coefcient shows that
1% change in oil prices will lead to 18.51%
increase in SRI portfolio return. This positive
effect could be because companies included in
SRI portfolio are able to offset the bad effect of
oil price increase with the good effect. In under-
standing the results, it is important to state that
based on gure 2, since most of the companies
are business support services, which provide
services even in the condition of increasing oil
prices where costs are rising as well.
To reiterate, this research aims to examine
the effect of Islamic screening criteria to the
portfolio selection and performance by compar-
ing it to SRI portfolio, which also has specic
criteria to determine the investments.
The ndings in this study conclude that
Shari’ah portfolio selection and performance
were inuenced by the Islamic screening cri-
teria, which was shown by the difference in
the Shari’ah portfolio composition and per-
formance from SRI portfolio. Composition of
Shari’ah portfolio could be from oil, mining,
and pharmaceuticals companies, while SRI
portfolio does not allow those types of compa-
nies to be included in the portfolio. In addition,
there are some nancial ratios which have to be
fullled by Shari’ah portfolio, while SRI port-
folio does not have such requirements. This led
to the result that Shari’ah portfolio performs
better in 2008, 2009, and 2010, mainly the -
nancial crisis years, indicating that Shari’ah
portfolio could be used to hedge the crisis.
However, the portfolio returns were inuenced
much by change in oil prices since the portfolio
mostly comprised of oil and mining companies.
In reecting upon further research, it could
be conducted by expanding the data sample,
portfolio size and time period so that a gen-
eralised analysis can be developed in a robust
manner. In addition, by expanding the time ho-
rizon, Gross Domestic Product and Openness
Index could be included, since both data are
available in quarterly which are not suitable
for this research. Regarding the methodology,
more advance portfolio optimization and coin-
tegration methods in examining the macroeco-
nomic variables’ effect could be employed to
obtain broader result and analysis.
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cessed at 19th of July 2014).
... For example, it is prohibited to sell or serve alcoholic drinks in restaurants, to engage in pork-based business (Wan Ismail et al., 2015). Meanwhile, the SRI stocks only have qualitative screening (Hendranastiti and Asutay, 2015). ...
... For example, Siminica et al. (2019) have found that SRI had non-positive relationship with accounting performance meanwhile Gherghina et al. (2015) and François (2011) showed that SRI could improve corporate values. Also, Hendranastiti and Asutay (2015), Klobukowska (2017), Pulungan et al. (2019), Risalvato et al. (2018) showed that Sharia-based stocks could outperform the SRI stocks. Based on the explanation, the first hypothesis is: H 1 Extension Markowitz portfolio based on Sharia and SRI stocks can outperform the market index. ...
... For example, it is prohibited to sell or serve alcoholic drinks in restaurants, to engage in pork-based business (Wan Ismail et al., 2015). Meanwhile, the SRI stocks only have qualitative screening (Hendranastiti and Asutay, 2015). ...
... For example, Siminica et al. (2019) have found that SRI had non-positive relationship with accounting performance meanwhile Gherghina et al. (2015) and François (2011) showed that SRI could improve corporate values. Also, Hendranastiti and Asutay (2015), Klobukowska (2017), Pulungan et al. (2019), Risalvato et al. (2018) showed that Sharia-based stocks could outperform the SRI stocks. Based on the explanation, the first hypothesis is: H 1 Extension Markowitz portfolio based on Sharia and SRI stocks can outperform the market index. ...
There has been on-going discussion about the performance of ethical investments. Unlike previous studies, this research used extension Markowitz model to measure the market-based performance of ethical investments in Indonesia. In addition, this research also investigated whether gold was the safe haven instrument for the extension-Markowitz portfolio in Indonesia when the equity market was in extreme turmoil. The stocks from environmentally friendly firms (SRI) and Jakarta Islamic Index (JII) in Indonesia were used as the proxies of ethical investments. The results showed that the extension of Markowitz model could create an optimum portfolio that outperformed the market index. The result of this study supported The Social Impact Hypothesis implying that environmental and social spending could improve stock market performance. Also, based on Quantile Regression (QREG) and Ordinary Least Squares (OLS), this study found that gold was the safe haven and hedging instrument for ethical investors in Indonesia.
... It should, however, be mentioned at this stage that while many of these studies revealed differences in the performance of both market segments, the evidence in these studies is inconclusive. For example, in several countries having different periods of study, a number of studies revealed that Islamic or Sharīʿah stock market indexes performed better compared to their conventional counterparts (Hassan, 2004;Bauer et al., 2006;Al-Khazali et al., 2014;Habib and Islam, 2014;Ho et al., 2014;Jawadi et al., 2014;Asutay and Hendranastiti, 2015;Charles et al., 2015;Dharani et al., 2019;Gonzalez et al., 2019;Tahir and Ibrahim, 2020). Other studies found similar or insignificantly different performance characteristics in both segments Hassan, 2008, 2010;Dharani and Natarajan, 2011;El-Khamlichi et al., 2014a;Trabelsi et al., 2020;Yildiz, 2020). ...
Purpose This study aims to investigate Malaysian stock market efficiency from the view of Sharīʿah-compliant and conventional stocks based on the effectiveness of technical trading strategies. Design/methodology/approach This study uses unconventional trading strategies that mix buy recommendations of Bursa Malaysia analysts with sell signals generated from 10 selected technical trading strategies (simple moving average, moving average envelopes, Bollinger Bands, momentum, commodity channel index, relative strength index, stochastic, Williams percentage range, moving average convergence divergence oscillator and shooting star) that are detected using ChartNexus. The period from 1 January 2013 until 31 December 2015 produces a total sample consists of 1,265 buy recommendations of 125 Sharīʿah-compliant stocks and 400 buy recommendations of conventional stocks. The study period is extended until 31 March 2016 to provide an ample time for detecting the sell signal especially for buy recommendations that are released towards the end of 2015. Findings The resulting Jensen’s alpha show 8 out of 10 strategies are effective in generating abnormal returns in Sharīʿah-compliant samples while only 3 out of 10 strategies are effective in conventional samples. Prominent effectiveness of technical trading strategies in Sharīʿah-compliant stocks implies clear inefficiency in that stock market segment as opposed to those of the conventional stocks. Originality/value The results based on unconventional trading strategies provide new insights of Malaysian stock market efficiency especially in Sharīʿah-compliant and conventional stocks. The paper provides more robust findings on market efficiency as firms’ equity level data were focussed together with analyst’s buy recommendations from Bursa Malaysia.
In this paper, we make an initial attempt to compare the asymmetric reaction of Islamic and conventional stock returns to implied volatility -market fear- using Wavelet-based Granger causality, asymmetric quantile regression model (QRM), and NARDL for the sample period from 2008 to 2019. Our findings are three-fold. First, the causal relationship between implied volatility and stock returns is scale-dependent. To make the analysis more robust, we decomposed the daily data using the wavelet filter to consider the potential of different investment horizons. Second, we observe, using QRM, regardless of Islamic or conventional, stock return increases (decreases) following the negative (positive) innovation in the market fear, and the asymmetry is more pronounced at the lowest and highest return regimes. Using NARDL, we find, there is an evidence of asymmetric cointegration and long-run asymmetric relationship. Third, Islamic stock returns tend to be less exposed to the market fear than conventional stock returns across the return regimes at different investment horizons. This relatively lesser sensitivity level of Islamic stock returns can be attributed to their distinct screening features and Islamic markets being more 'decoupled' from the risks facing conventional markets. The results tend to have substantial policy implications for all the stakeholders.
The purpose of this article is to propose an alternative approach for portfolio optimization combining financial and ethical constraints in one hand, and objective and subjective investor’s preferences in the other hand. This approach intends to support investors in selecting and optimizing financial and social portfolio’s performances. More precisely, we introduce analytic hierarchy process (AHP) to measure the ethical performance (EP) score of each asset considering ethical criteria. For its part, fuzzy multiple criteria decision making (FMCDM) is used to determine the overall financial quality score of assets with respect to key financial criteria i.e., short term return, long term return, and risk. Besides, interactive fuzzy programming approach is applied to support the investor’s decision, considering its subjective preferences. The robustness of our approach is tested through an empirical study involving the case of the Casablanca Stock Exchange (CSE). The results give evidence that the Socially Responsible (SR) Portfolio have performed similar to the conventional one, as no significant differences were found in term of return. However, the SR portfolio allows the investor to achieve his ethical goal, against a slight financial sacrifice.
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Conference Paper
Katılım bankacılığı; İslami prensiplerine uygun olarak faaliyetlerini gerçekleştiren bir bankacılık modelidir. Katılım bankaları ilkelerine göre düzenlenen katılım endeksleri dünya çapında uzun yıllardır var olmasına rağmen ülkemizde 2011 yılından bugüne hızlı bir büyüme göstermiştir. Son dönemlerde öne çıkan bir diğer endeks kurumsal yönetim endeksidir. Gerek katılım endeksi gerekse kurumsal yönetim endeksi BİST’de ki diğer sektör endekslerinden farklı olarak daha homojen olan endekslerdir. Bu açıdan, bu çalışmada Kurumsal Yönetim Endeksi ve İslami prensiplere uygun hisse senetlerinden oluşan katılım 30 Endeksi ile BİST 50 Endeksi’nin 10 Ocak 2011 ile 22 Aralık 2016 tarihleri arasındaki risk ve getiri karakterleri incelenmiştir. Çalışma dönemi üç artan ve dört azalan piyasa dönemi olmak üzere yedi alt döneme ayrılmıştır.
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We find no convincing performance differences between Islamic and non-Islamic indexes from January 1999 to December 2006. Islamic indexes are growth and small-cap oriented and conventional indices are relatively more value and mid-cap focused. After controlling for market risk, size, book-to-market, momentum, and local and global factors, we conclude that the difference in return between Islamic and conventional indices is not significant. Our findings suggest that the difference in performance of Islamic indices as compared to conventional indices is attributed to style differences between the two types of series. The multivariate cointegration analysis suggests that both the Islamic and conventional groups are integrated for the overall period. Overall, similar reward to risk and diversification benefits exist for both types of indexes.
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Purpose The purpose of this paper is to analyze the impact of applying alternative Shariah screens on the resulting universe of halal assets and to show that Shariah screening procedures currently used in practice are inconsistent with respect to discriminating between halal and haram. Design/methodology/approach An empirical data analysis of the different asset universes obtained when applying the criteria specified by the most prominent Shariah‐compliant funds and indexes to a common standard asset universe, the assets contained in the S&P 500 index. Findings Analysis reveals that the asset universes are significantly different in size as well as constituents, i.e. for every index there is a substantial number of assets which are specified as halal or haram but classified the opposite way for other indexes. This indicates that, so far, there is no universal or generally accepted understanding of how to transform the descriptive Shariah rules into a system of checkable investment guidelines. Research limitations/implications The results presented in this paper could motivate the development of a standardized screening framework which, taking into account the existing Shariah guidelines, produces a controlled, unified and understandable classification of assets, by which the credibility and consistency of Islamic equity products is enriched. Practical implications Islamic institutions and Shariah scholars are guided to set up a common and standardized Shariah screening norm based on which computer‐based management systems for Shariah compatible portfolios could be developed. Originality/value This paper is believed to be the first empirical comparative analysis identifying the impact of using different Shariah screens on the composition of the compliant asset universe. The sensitization of Shariah scholars, fund managers and Islamic investors for the consequences of this so far undiscovered relation will certainly contribute to an enrichment of the credibility and consistency of Islamic equity products.
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I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
Conference Paper
The analysis on the portfolio theory doubtfully complies with shariah. Therefore, this paper presented a review to the Markowitz's Mean Variance Model (Portfolio Theory) and discussed the fundamentals underlying the model in term of shariah compliances. First, the assumptions of Markowitz's model were revised in term of compliances with shariah and the appropriate modifications were discussed that lead to the variation of efficient frontier and the characteristic of return and risk. Intriguingly, the principles of Islamic finance do agree with many conventions underlying the model. However, it was uncovered that Islamic variables such as prohibition of short selling, purification and zakat, should be integrated in the model. Lastly, the study presented empirical results on the new Islamic mean variance analysis in term of the resulting efficient frontier. In conclusion, a new revised mean-variance analysis should overcome the gap in conventional tools in measuring risk and returns and making decision on the choice of investments according to shariah.
Book A Brief about the Book: In ‘Understanding Islamic Finance’ Muhammad Ayub introduces all the essential elements of this growing market by providing an in-depth background to the subject and clear descriptions of all the major products and processes associated with Islamic finance. Key features include: • discussion of the principles of Islamic finance; • introduction to the key products and procedures that International Financial Institutions are using or may adopt to fund a variety of clients ensuring Shari´ah compliance; • discussion of the role Islamic finance can play in the development of the financial system and of economies; • practical and operational examples that cover deposit and fund management by banks, financing of various sectors of the economy, risk management, accounting treatment, and working of Islamic financial markets and instruments, and • appraisal of common criticism of Islamic finance This book is not only an important text for all those who work in banks and financial institutions entering this particular market with a commitment to building Islamic financial solutions, but is also an essential reading for undergraduate and postgraduate students of Islamic finance.
There has been a recent increase in the importance of and universal interest in the field of “Islamic Finance.” There are currently investment alternatives which are designed to meet the constraints imposed by Islamic Shariah, such as SUKUKS (Islamic bonds) and Islamic mutual funds. This paper explores the similarities and differences between the components and characteristics of Islamic mutual funds, Christian mutual funds, both classified as Morally Responsible Investment (MRI) funds, and socially responsible investment (SRI) funds. In addition, we explore the possibility of designing a mutual fund which can satisfy the three different groups of investors.
This best-selling textbook addresses the need for an introduction to econometrics specifically written for finance students. Key features: • Thoroughly revised and updated, including two new chapters on panel data and limited dependent variable models • Problem-solving approach assumes no prior knowledge of econometrics emphasising intuition rather than formulae, giving students the skills and confidence to estimate and interpret models • Detailed examples and case studies from finance show students how techniques are applied in real research • Sample instructions and output from the popular computer package EViews enable students to implement models themselves and understand how to interpret results • Gives advice on planning and executing a project in empirical finance, preparing students for using econometrics in practice • Covers important modern topics such as time-series forecasting, volatility modelling, switching models and simulation methods • Thoroughly class-tested in leading finance schools. Bundle with EViews student version 6 available. Please contact us for more details.
Emerging stock markets have been identified as being at least partially segmented from global capital markets. As a consequence, it has been argued that local factors rather than global factors are the primary source of equity return variation in these markets. This paper seeks to address the question of whether local macroeconomic variables have explanatory power over stock returns in emerging markets. Moderate evidence is found to support this contention. Furthermore, using a principal components approach, two types of commonality in returns are examined. Evidence is found that supports commonality in the factors that drive return variation across emerging markets. A test is also conducted for identical sensitivity to a common set of extracted factors. While little evidence of common sensitivities is found when emerging markets are considered collectively, considerable commonality is found at the regional level. These results have implications for international investors as they suggest that the benefits from diversification are enhanced when the allocation of funds is spread across, rather than within, regions.
Risk typically represents investments’ double-edged sword. Quantifying the adequate amount of risk to be assumed could be difficult, especially when “too much risk could turn out to be too little.” Under Islamic finance, managing risk is even more challenging. On the one hand, assuming high levels of risk is not encouraged. On the other, Islamic screening rules restrict investment and consequently stimulate risk. This paper considers the above dilemma by examining the effect of adopting screening rules on stock indices risk. The study, conducted using monthly data from FTSE Global Islamic, tests the hypothesis that the Islamic index yields adequate returns for the level of risk undertaken. Results show that the Islamic index surpasses the socially responsible index in performance while operating in line with the market. This risk assessment result does not resolve the dilemma but assures the economic appropriateness of the procedures adopted in managing the Islamic index.
Do investors pay a price for investing in socially responsible investments (SRI) funds, or do they obtain superior returns? This paper investigates these under- and overperformance hypotheses for all SRI funds across the world. Consistent with investors paying a price for ethics, SRI funds in the US, the UK, and in many continental European and Asia-Pacific countries underperform their domestic benchmarks by - 2.2% to - 6.5%. However, with the exception of some countries such as France, Japan and Sweden, the risk-adjusted returns of SRI funds are not statistically different from the performance of conventional funds. We also find that the underperformance of SRI funds is not driven by loadings on an ethics style factor. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying funds that will perform poorly. Finally, corporate governance and social screens yield lower risk-adjusted returns.