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Is There A Diversification “Cost” of Shari’ah Compliance? Empirical Evidence from Malaysian Equities

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  • Kamil, Nazrol
  • Bacha, Obiyadulla
  • Masih, Mansur

Abstract

Islamic equity portfolios work with a smaller investment universe given the filtering of non-Shari’ah compliant stocks. It has been theoretically argued that this culminates in suboptimal portfolio diversification which in turn adversely affects risk-adjusted returns. We employ a number of methods, namely construction of efficient frontiers, time-varying maximum Sharpe ratios, MGARCH-DCC and analysis of covariance (ANCOVA), to offer empirical evidence that such a conceived portfolio diversification “penalty” is far from a foregone conclusion, at least empirically. Our results show that Islamic portfolios are not invariably handicapped in terms of portfolio diversification. We also explored dimensions which may account for differences in relative investment performance between Islamic and conventional portfolios such as portfolio constraints, length of investment horizon and market conditions. We believe this paper is among the first to apply substantial empirical analysis of the portfolio diversification perspective on Islamic equity investments.

Suggested Citation

  • Kamil, Nazrol & Bacha, Obiyadulla & Masih, Mansur, 2014. "Is There A Diversification “Cost” of Shari’ah Compliance? Empirical Evidence from Malaysian Equities," MPRA Paper 56951, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:56951
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    Cited by:

    1. Abdelkader Derbali & Abderrazek El Khaldi & Fathi Jouini, 2017. "Shariah-compliant Capital Asset Pricing Model: new mathematical modeling," Journal of Asset Management, Palgrave Macmillan, vol. 18(7), pages 527-537, December.

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    More about this item

    Keywords

    Islamic equity portfolio; portfolio diversification; efficient frontier; maximum Sharpe ratio; MGARCH-DCC; analysis of covariance (ANCOVA);
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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