Does Low Leverage Minimise the Impact of Financial Shocks? New Optimisation Strategies Using Islamic Stock Screening for European Portfolios

Ouatik el Alaoui, A.; Ismath Bacha, O.; Masih, M.; Asutay, M.

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.

Citation

Ouatik el Alaoui, A., Ismath Bacha, O., Masih, M., & 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, 160-184. https://doi.org/10.1016/j.intfin.2018.07.007

• Journal Article Type: Article
• Acceptance Date: Jul 21, 2018
• Online Publication Date: Jul 24, 2018
• Publication Date: Nov 1, 2018
• Deposit Date: Jul 24, 2018
• Publicly Available Date: Jul 24, 2019
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Electronic ISSN: 1873-0612
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 57
• Pages: 160-184
• DOI: https://doi.org/10.1016/j.intfin.2018.07.007
• Public URL: https://durham-repository.worktribe.com/output/1353651