Home / Regular Issue / JSSH Vol. 29 (2) Jun. 2021 / JSSH-7667-2020

 

Market Timing and Stock Selection Strategies in Shariah- Compliant Stock Portfolio

Muhammad Akhimullah Abd Halim, Siti Masitah Elias and Karmila Hanim Kamil

Pertanika Journal of Social Science and Humanities, Volume 29, Issue 2, June 2021

DOI: https://doi.org/10.47836/pjssh.29.2.26

Keywords: Individual investors, market timing, Moving Average Crossover, Shariah-compliant equities, Sharpe Ratio Maximisation, stock selection

Published on: 28 June 2021

This study focuses on market timing and stock selection strategies that could be implemented by individual investors of Shariah-compliant equity using the top ten constituents of the FTSE Bursa Malaysia Hijrah Shariah Index. Investors are assumed to enter and exit the stock market following the buy-and-sell signal from Moving Average Crossover. Meanwhile, for stock selection, this study aims to construct the optimal portfolio using the Sharpe Ratio Maximisation model and Naïve (1/N) portfolio. The level of market timing and selectivity skills of individual investors following the suggested investment strategies will be measured by using the Treynor-Mazuy model. The empirical results showed that the best Moving Average Crossover gave plausible trading frequencies and provided the most return to investors was the (1, 100, 0.01) strategy. Albeit, the stock allocation for the constructed portfolio was less diversified compared to the Naïve (1/N) portfolio, the composition of portfolio weights of the constructed portfolio was able to offer a more than average risk to reward ratio. Furthermore, in the out-of-sample framework, both portfolios outperformed the market benchmark. Unlike previous studies, this study backed tests the strategy and found that it was beneficial for individual investors of Shariah-compliant equities to enhance market timing and selectivity skills in stock investment.

  • Ahmad, Z., & Ibrahim, H. (2002). A study of performance of the KLSE Syariah index. Malaysian Management Journal, 6(1&2), 25-34.

  • Alam, N., Tang, K. B., & Rajjaque, M. S. (2016). A comparative performance of conventional and Islamic unit trusts: Market timing and persistence evidence. In Islamic finance (pp. 105-121). Palgrave Macmillan. https://doi.org/10.1007/978-3-319-30918-7_7

  • Albaity, M., & Ahmad, R. (2008). Performance of Syariah and composite indices: Evidence from Bursa Malaysia. Asian Academy of Management Journal of Accounting Finance, 4(1), 23-43.

  • Albaity, M., & Ahmad, R. (2011). A comparative analysis of the firm specific determinants of Syariah compliant versus non-Syariah compliant firms in Bursa Malaysia. Asian Journal of Business Accounting, 4(1), 59-84.

  • Anghel, D. (2013). How reliable is the moving average crossover rule for an investor on the Romanian stock market? The Review of Finance Banking, 5(2), 89-115.

  • Ashraf, D. (2013). Performance evaluation of Islamic mutual funds relative to conventional funds. International Journal of Islamic Middle Eastern Finance Management, 6(2), 105-121. https://doi.org/10.1108/17538391311329815

  • Baresa, S., Bogdan, S., & Ivanovic, Z. (2018). The performance of minimum variance portfolios in the Croatian tourism sector. UTMS Journal of Economics, 9(1), 63-72.

  • Behr, P., Guettler, A., & Miebs, F. (2013). On portfolio optimization: Imposing the right constraints. Journal of Banking Finance, 37(4), 1232-1242. https://doi.org/10.1016/j.jbankfin.2012.11.020

  • Bessler, W., Opfer, H., & Wolff, D. (2017). Multi-asset portfolio optimization and out-of-sample performance: an evaluation of Black–Litterman, mean-variance, and naïve diversification approaches. The European Journal of Finance, 23(1), 1-30. https://doi.org/10.1080/1351847X.2014.953699

  • Bodnar, T., & Zabolotskyy, T. (2017). How risky is the optimal portfolio which maximizes the Sharpe ratio? AStA Advances in Statistical Analysis, 101(1), 1-28. https://doi.org/10.1007/s10182-016-0270-3

  • Brock, W., Lakonishok, J., & LeBaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. The Journal of Finance, 47(5), 1731-1764.

  • Chang, E. C., & Lewellen, W. G. (1984). Market timing and mutual fund investment performance. The Journal of Business, 57(1), 57-72. https://doi.org/10.1086/296224

  • Das, P. K., & Rao, S. U. (2015). Market timing and selectivity performance of socially responsible funds. Social Responsibility Journal, 11(2), 258-269. https://doi.org/10.1108/SRJ-07-2013-0088

  • DeMiguel, V., Garlappi, L., & Uppal, R. (2009). Optimal versus naive diversification: How inefficient is the 1/N portfolio strategy? The Review of Financial Studies, 22(5), 1915-1953. https://doi.org/10.1093/rfs/hhm075

  • El-Khodary, I. A. (2009). A decision support system for technical analysis of financial markets based on the moving average crossover. World Applied Sciences Journal, 6(11), 1457-1472.

  • Elias, S. M., Razak, M. Z., & Kamil, K. H. (2014). Investment strategies in Malaysian Shariah-compliant equities with transaction costs. ʻUlūm Islāmiyyah Journal, 13, 179-196.

  • Faber, M. T. (2007). A quantitative approach to tactical asset allocation. The Journal of Wealth Management, 9(4), 69-79. https://doi.org/https://doi.org/10.3905/jwm.2007.674809

  • Fama, E. F. (1972). Components of investment performance. The Journal of Finance, 27(3), 551-567. https://doi.org/10.2307/2978261

  • Fikriyah, A., Hassan, T., & Mohamad, S. (2007). Investigation of performance of Malaysian Islamic unit trust funds. Managerial Finance, 33(2), 142-153. https://doi.org/10.1108/03074350710715854

  • Hassan, A., & Antoniou, A. (2005). Impact of ethical screening on investment performance: The case of the Dow Jones Islamic Index. Islamic Economic Studies, 12 & 13(1 & 2), 67-97.

  • Henriksson, R. D., & Merton, R. C. (1981). On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. Journal of Business, 513-533. https://doi.org/10.1086/296144

  • Hoe, L. W., & Siew, L. W. (2016). Portfolio optimization with mean-variance model. AIP Conference Proceedings, 1739(1), 10-13. https://doi.org/10.1063/1.4952526

  • Ivanova, M., & Dospatliev, L. (2017). Application of Markowitz portfolio optimization on Bulgarian stock market from 2013 to 2016. International Journal of Pure Applied Mathematics, 117(2), 291-307. https://doi.org/10.12732/ijpam.v117i2.5

  • Jensen, M. C. (1969). Risk, the pricing of capital assets, and the evaluation of investment portfolios. The Journal of Business, 42(2), 167-247. https://doi.org/10.1017/CBO9781107415324.004

  • Kannan, K. S., Sekar, P. S., Sathik, M. M., & Arumugam, P. (2010). Financial stock market forecast using data mining techniques. Proceedings of the International Multiconference of Engineers and Computer Scientists, IMECS 2010, 1(4), 555-559.

  • Kourtis, A. (2016). The Sharpe ratio of estimated efficient portfolios. Finance Research Letters, 17, 72-78. https://doi.org/10.1016/j.frl.2016.01.009

  • Kreander, N., Gray, R. H., Power, D. M., & Sinclair, C. D. (2005). Evaluating the performance of ethical and non-ethical funds: A matched pair analysis. Journal of Business Finance Accounting, 32(7-8), 1465-1493. https://doi.org/10.1111/j.0306-686X.2005.00636.x

  • Kulali, I. (2016). Portfolio optimization analysis with markowitz quadratic mean-variance model. European Journal of Business Management, 8(7), 73-79.

  • Lean, H. H., & Parsva, P. (2012). Performance of Islamic indices in Malaysia FTSE market: Empirical evidence from CAPM. Journal of Applied Sciences, 12(12), 1274-1281. https://doi.org/10.3923/jas.2012.1274.1281

  • Lee, C. F., & Rahman, S. (1990). Market timing, selectivity, and mutual fund performance: An empirical investigation. Journal of Business, 63(2), 261-278.

  • Low, S. W. (2012). Market timing and selectivity performance: A cross-sectional analysis of Malaysian unit trust funds. Prague economic papers, 2, 205-219. https://doi.org/10.18267/j.pep.419

  • M’ng, J. C. P., & Zainudin, R. (2016). Assessing the efficacy of adjustable moving averages using ASEAN-5 currencies. PLoS One, 11(8), 1-19. https://doi.org/10.1371/journal.pone.0160931

  • Mansor, F., & Bhatti, M. I. (2011). Risk and return analysis on performance of the Islamic mutual funds: Evidence from Malaysia. Global Economy and Finance Journal, 4(1), 19-31.

  • Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91. https://doi.org/10.1002/9781118267028.ch3

  • Nassir, A. M., Mohamed, S., & Ngu, M. H. (1997). Selectivity and timing: Evidence from the performance of Malaysian unit trusts. Pertanika Journal of Social Science Humanities, 5(1), 45-57.

  • Oliveira, L., Salen, T., Curto, J. D., & Ferreira, N. (2019). Market timing and selectivity: An empirical investigation of European mutual fund performance. International Journal of Economics and Finance, 11(2), 1-16. https://doi.org/10.5539/ijef.v11n2p1

  • Paramita, V. S., Sembiring, F. M., & Safitri, D. (2018). Measuring selectivity and market timing performance of mutual funds in Indonesia using single and dual beta models. KnE Social Sciences, 3(10), 1800-1809. https://doi.org/10.18502/kss.v3i10.3515

  • Pflug, G. C., Pichler, A., & Wozabal, D. (2012). The 1/N investment strategy is optimal under high model ambiguity. Journal of Banking & Finance, 36(2), 410-417. https://doi.org/10.1016/j.jbankfin.2011.07.018

  • Schmid, W., & Zabolotskyy, T. (2008). On the existence of unbiased estimators for the portfolio weights obtained by maximizing the Sharpe ratio. AStA Advances in Statistical Analysis, 92(1), 29-34. https://doi.org/10.1007/s10182-008-0054-5

  • Shaikh, S. A., Ismail, M. A., Ismail, A. G., Shahimi, S., & Shafiai, M. H. M. (2019). Comparative analysis of Shari’ah-compliant portfolios: evidence from Pakistan. Journal of Islamic Accounting and Business Research, 10(3), 466-487. https://doi.org/10.1108/JIABR-10-2016-0121

  • Siew, L. W., Jaaman, S. H., & Ismail, H. (2016). Portfolio optimization for index tracking modelling in Malaysia stock market. AIP Innovations Through Mathematical and Statistical Research, 1739(1), 020025. https://doi.org/10.1063/1.4952505

  • Treynor, J., & Mazuy, K. (1966). Can mutual funds outguess the market. Harvard Business Review, 44(4), 131-136.

  • Vo, D. H., Pham, T. N., Pham, T. T. V., Truong, L. M., & Nguyen, T. C. (2019). Risk, return and portfolio optimization for various industries in the ASEAN region. Borsa Istanbul Review, 19(2), 132-138. https://doi.org/10.1016/j.bir.2018.09.003

  • Wong, W. K., Manzur, M., & Chew, B. K. (2010). How rewarding is technical analysis? Evidence from Singapore stock market. Applied Financial Economics, 13(7), 543-551. https://doi.org/10.1080/0960310022000020906

  • Zakamulin, V. (2014). The real-life performance of market timing with moving average and time-series momentum rules. Journal of Asset Management, 15(4), 261-278. https://doi.org/10.1057/jam.2014.25

  • Zhang, Y., Wei, Y., Ma, F., & Yi, Y. (2019). Economic constraints and stock return predictability: A new approach. International Review of Financial Analysis, 63, 1-9. https://doi.org/10.1016/j.irfa.2019.02.007

ISSN 0128-7702

e-ISSN 2231-8534

Article ID

JSSH-7667-2020

Download Full Article PDF

Share this article

Related Articles