Political Risk and Portfolio Performance: Implications for Shariah-Compliant Investors

19 Pages Posted: 31 Jul 2020

See all articles by Muhammad Wajid Raza

Muhammad Wajid Raza

Shadeed Benazir Bhutto University, Dir, Pakistan

Tahir Suleman

Wellington Institute of Technology

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business

Date Written: July 5, 2020

Abstract

Political risk is an important determinant of portfolio returns. In this study, we revisit the importance of political risk in the context of a constrained portfolio, namely a Shariah-compliant equity portfolio, invested in 61 international markets. The weights of each constituent are driven by its relative exposure to political risk for the period 1996–2018.Results show that, in comparison with conventional investors, the Shariah-compliant investors gain substantial benefits when the allocation decision is based on political risk. A Shariah-compliant portfolio outperforms its conventional counterpart by 7.98% annually when tilted toward politically stable countries. The economic benefits further increase to 804 basis points when the portfolio allocates more funds to politically unstable countries. The tilted Shariah-compliant equity portfolio successfully reduces the downside risk, and hence results in improved stability in financial performance.

Keywords: Political risk, International portfolio diversification, Shariah-compliant portfolios, Performance evaluation, Shariah-compliant investments

JEL Classification: G11

Suggested Citation

Raza, Muhammad Wajid and Suleman, Tahir and Zaremba, Adam, Political Risk and Portfolio Performance: Implications for Shariah-Compliant Investors (July 5, 2020). Available at SSRN: https://ssrn.com/abstract=3643680 or http://dx.doi.org/10.2139/ssrn.3643680

Muhammad Wajid Raza (Contact Author)

Shadeed Benazir Bhutto University, Dir, Pakistan ( email )

http://www.sbbu.edu.pk/
http://www.sbbu.edu.pk/
Sheringal, Khyber Pakhtunkhwa 18000
Pakistan

Tahir Suleman

Wellington Institute of Technology ( email )

21 Kensington Ave
Petone, Wellington 5012
New Zealand

Adam Zaremba

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
247
PlumX Metrics