Abstract
This paper aims to contribute to the existing literature in portfolio management and strategy by investigating the performance, diversification, and hedging benefits arising from integrating Sharia-compliant stocks into a conventional portfolio. Thus, this paper tests the performance of a Combined Portfolio, resulting from the combination of conventional Islamic instruments, covering different macroeconomic scenarios in the last decade (2010–2020). The strategic asset allocation was designed following the Global Macro Anima (GMA) strategy, solving a risk-parity optimisation problem using a specifically developed MATLAB™ algorithm. The findings will contribute to answering the question related to the possibility of including alternative instruments to increase diversification with hedging benefits by building asset allocations that perform well across different macroeconomic scenarios.
Highlights
COVID-19 has strongly stressed and tested the global financial markets, representing a tough challenge for asset management
The pandemic represents an exogenous economic shock, this depends on unpredictable noneconomic factors, different from the global financial crisis in 2008 (GFC) or the European sovereign debt crisis in 2010–2013, which were endogenous shocks due to financial reasons (Borio 2020)
The COVID-19 shock has renewed the attention, on the one hand, on the diversification opportunities and potential hedging benefits offered by Islamic equities, and on the other hand, on the rejection of the hypothesis of the Islamic Stock Market (ISM) from the conventional market, especially during high-volatility and uncertain periods
Summary
COVID-19 has strongly stressed and tested the global financial markets, representing a tough challenge for asset management. The pandemic represents an exogenous economic shock, this depends on unpredictable noneconomic factors, different from the global financial crisis in 2008 (GFC) or the European sovereign debt crisis in 2010–2013, which were endogenous shocks due to financial reasons (Borio 2020) It affects the global economy, triggering several sectors, such as labour markets, global supply chains, and consumption behaviour, since national authorities have declared lockdowns ordering the shutdown of most noncore business activities. The emerging and developed stock markets have gradually fallen, declaring the hunt’s open season to safe-haven assets to limit the contagion effects For this purpose, scholars are keeping an eye on the Islamic Financial System (IFS), which demonstrated more stability and resilience due to the intrinsic underpinnings of ethicality and sustainability of the Shariah-compliant principles (Arouri et al 2013; Ashraf et al 2020; Hengchao and Hamid 2015; Jawadi et al 2014; Paltrinieri et al 2019). During the COVID-19 crash, which was severe and quick, every market crash awakened and reinforced some longstanding trending topics for academics and practitioners, such as:
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