The economic benefits of market timing the style allocation of characteristic-based portfolios

Ardia, David; Boudt, Kris; Wauters, Marjan

doi:10.1016/j.najef.2016.03.010

Cited by 10 publications

(3 citation statements)

References 36 publications

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“…For example, the low-risk strategy which overweights low beta stocks under-performs the market capitalization portfolio in bull markets and outperform in bear markets. The same findings hold in the absence of Shariah constraints (Ardia et al, 2016). Next we discuss the portfolio construction methodology for all four portfolio investment styles.…”

Section: Single Style Shariah-compliant Portfoliossupporting

confidence: 61%

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

Boudt

Raza

Ashraf

2019

Journal of International Financial Markets, Institutions and Mo

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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 Shariahcompliant 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. Ó 2019 Elsevier B.V. All rights reserved. ''Investment strategies will also wax and wane, performing well in certain environments and performing poorly in other environments." [Andrew Lo, 2004.] The two-fund separation theorem of Tobin (1958) prescribes that mean-variance efficient investors allocate their portfolio to a risk-free asset and risky assets with the aim to maximize their expected returns at a given level of risk. While the result has been seminal in modern finance theory, it is of little relevance for the Shariah-compliant equity investor due to business and finance-related restrictions. A Shariah-compliant investor may not invest in the shares of those companies engaged in the production of goods and services related to alcohol, tobacco, gambling, adult entertainment, weapons, swine, media and broadcasting, borrowing and/or lending based on Usury (interest), or game of chance (excess speculation). The restrictions on investments reduce the investable universe of equities for Islamic investors (Arslan-Ayaydin et al., 2018; Ashraf, 2016). Implementing those restrictions involves screening stocks from an investment universe and then selecting an asset allocation strategy. Ashraf and Khawaja (2016) structured Shariah-compliant equity portfolios using a market-capitalization approach and found that Shariah screening reduces the investable universe to almost half with minimal difference in performance as compared with unscreened portfolios. As an alternative, Boudt et al. (2017) investigated the use of so-called

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Section: Single Style Shariah-compliant Portfoliossupporting

confidence: 61%

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

Boudt

Raza

Ashraf

2019

Journal of International Financial Markets, Institutions and Mo

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“…The latter explain that the heuristic approach tends to mimic the portfolio allocations obtained by minimum variance optimization. This method is also used by the S&P 500 low volatility index and by Ardia, Boudt, and Wauters (2016). We follow this two-step approach and thus set the low risk approach based weights as follows:…”

Section: Low Risk Weightedmentioning

confidence: 99%

Evaluating the Shariah-compliance of equity portfolios: The weighting method matters

Boudt

Raza

Wauters³

2019

International Review of Financial Analysis

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The choice of weighting method in constructing an equity portfolio affects not only the financial performance, but also its Shariah-compliance. We show how the implicit bets in market capitalization, fundamental value, equal and low risk weights can affect the individual's perception of Shariah compliance of the financial portfolio. For the universe of Shariah-compliant S&P 500 stocks over the period 1986-2014, we find that the risk-adjusted performance is improved when using the alternative weighting methods compared with the traditional use of market capitalization weighting. The choice of weighting method matters for the Shariah-compliant equity investor, both in terms of compliance with the primary objectives of Shariah investing and in terms of the secondary objective of optimizing the financial performance of the portfolio.

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“…The initial regression is based on 240 monthly observations and an expanding estimation window is used. 11 We refer to Ardia et al (2016) and references therein for a more general tactical portfolio optimization problem that involves also optimizing the allocation of the equity portfolio to the underlying stocks.…”

Section: Tactical Asset Allocation Implementationmentioning

confidence: 99%