Portfolio optimisation of Shariah-compliant samples in the USA

Mohd Edil Abd Sukor and Asyraf Abdul Halim

Journal of Islamic Accounting and Business Research, 2022, vol. 14, issue 1, 34-57

Abstract: Purpose - This paper aims to investigate the dynamic portfolio optimisation performance of numerous samples of Shariah-compliant firms in the USAvis-à-visthe overall conventional sample. Design/methodology/approach - This paper constructs efficient frontiers and subsequently the capital market line using theovportset of commands in STATA. From the capital market line, the tangent portfolio is found, and the Sharpe ratio of the tangent portfolio is the primary measurement of the dynamic portfolio optimisation performance of the samples of Shariah-compliant samples in this study. Findings - This paper finds that the overall conventional sample will outperform the Shariah-compliant samples in most cases. However, there exists a consistent trend whereby the performance of the overall conventional sample will converge towards the performance of the Shariah-compliant samples (and even be lower at times), as the market approaches a looming crisis suggesting that the Shariah-compliant samples do not experience significant deteriorations in their performance as compared to the conventional sample and that they provide stability during such times. Research limitations/implications - This paper assumes no transaction costs, illiquidity, bid-ask spread and non-compliant revenue purification all of which may negatively affect portfolio performance. Practical implications - The findings of this paper suggest that Shariah-compliant samples should be included in portfolios during times of crisis because they are less affected by market-wide volatility. Social implications - The stability of Shariah-compliant samples reflects the conservativity of the contemporary Shariah stock screening methodologies and the Shariah itself. Originality/value - Portfolio optimisation studies on Shariah-compliant samples are usually static in nature and are conducted in selected Muslim countries. This paper studies the dynamic portfolio optimisation in the USA where a liquid Islamic capital market is non-existent.

Keywords: Shariah-compliant firms; Dynamic portfolio optimisation; Efficient frontier; Capital market line; Sharpe ratios; US firms (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-10-2021-0278

DOI: 10.1108/JIABR-10-2021-0278

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