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Does low leverage minimise the impact of financial shocks? New optimisation strategies using Islamic stock screening for European portfolios.

Ouatik el Alaoui, A. and Ismath Bacha, O. and Masih, M. and Asutay, M. (2018) 'Does low leverage minimise the impact of financial shocks? New optimisation strategies using Islamic stock screening for European portfolios.', Journal of international financial markets, institutions and money., 57 . pp. 160-184.

Abstract

This study embodies a preliminary endeavour at analysing the impact of leverage on portfolio behaviour, with specific reference to return and volatility, in the European stock markets, using the debt ratio as one of the important benchmarks for Islamic stock screening. Given the focus of Islamic stock screening on the debt ratio, we use data from 320 firms for eight European countries which were classified according to their level of debt and size. For this, the portfolio optimisation based Mean-Variance Efficient Frontier (MVEF), the Sharpe Ratio and the Capital Market Line (CML) were employed. Our findings tend to demonstrate that, under shocks, high leverage worsens the portfolio return, volatility, and value at risk. The results further point out that optimal portfolio composition is obtained through a high proportion of low debt funds in the case of two separate equity funds, of low debt and high debt portfolios respectively. The systematic risk of several portfolio strategies is further explored with regards to a benchmark of European index and market-wide, return and volatility shocks.

Item Type:Article
Full text:(AM) Accepted Manuscript
First Live Deposit - 24 July 2018
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1016/j.intfin.2018.07.007
Publisher statement:© 2018 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Record Created:24 Jul 2018 14:28
Last Modified:24 Jul 2019 09:17

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