Do constraints on financial and operating leverage affect the performance of Islamic equity portfolios?

Dawood Ashraf, Karl Felixson, Mohsin Khawaja, Syed Mujahid Hussain

Research output: Contribution to journalArticleScientificpeer-review

10 Citations (Scopus)

Abstract

The Islamic equity screening standards specifically forbid investment in equities of companies with high financial leverage and a low fraction of investment in real assets. We investigate how these constraints on financial leverage and higher investment in real assets (operating leverage) affect the performance of Islamic equity portfolios (IEPs). The empirical findings suggest that investors sacrifice potential returns by holding constrained portfolios but also avoid some of the risk. The exact effect on portfolio performance is largely dependent of the actual screening standard used, either book-value based (MSCI) or market-value based (AAOIFI). These results have clear implications for both investors and policy makers.
Original languageEnglish
Peer-reviewed scientific journalPacific-Basin Finance Journal
Volume42
Issue numberApril
Pages (from-to)171-182
Number of pages12
ISSN0927-538X
DOIs
Publication statusPublished - 24.02.2017
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • Islamic equity investments
  • Portfolio management
  • Investment in real assets
  • Leverage

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