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Islamic portfolio optimization under systemic risk: Vine Copula‐CoVaR based model

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  • Sana Braiek
  • Rihab Bedoui
  • Lotfi Belkacem

Abstract

We propose a new methodology based on CoVaR to optimize Islamic portfolio. First, we generate the return distribution using the ARMA‐FIAPARCH and ARMA‐FIGARCH model. Then, we transform the standardized residuals onto copula scale using the empirical cumulative distribution function. Thereafter, using the best vine‐copula fits, we computed downside and upside risk. We obtained CoVaR of the market (sectors), conditional on the VaR for sectors (market) returns. We find the optimized portfolio wt through mean‐CoVaR optimization. The empirical results of Islamic industry show that the optimal allocation is influenced by the existence of systemic risk. Thus, when comparing the mean‐CoVaR model with the mean–Variance model we find that mean‐CoVaR more performant in optimization. The minimum risk portfolio allocation is influenced by the existence of systemic risk, the interdependence structure between sectors and the optimization model. Our findings offer a better understanding of the allocation during the crisis period which is very valuable for the international investors, multinational corporations and portfolio managers.

Suggested Citation

  • Sana Braiek & Rihab Bedoui & Lotfi Belkacem, 2022. "Islamic portfolio optimization under systemic risk: Vine Copula‐CoVaR based model," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1321-1339, January.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:1:p:1321-1339
    DOI: 10.1002/ijfe.2217
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    1. Mengting Li & Qifa Xu & Cuixia Jiang & Yezheng Liu, 2024. "The role of long‐ and short‐run correlation networks in international portfolio selection," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3147-3176, July.
    2. Pejman Peykani & Mostafa Sargolzaei & Mohammad Hashem Botshekan & Camelia Oprean-Stan & Amir Takaloo, 2023. "Optimization of Asset and Liability Management of Banks with Minimum Possible Changes," Mathematics, MDPI, vol. 11(12), pages 1-24, June.
    3. Ghaemi Asl, Mahdi & Rashidi, Muhammad Mahdi & Tavakkoli, Hamid Raza & Rezgui, Hichem, 2024. "Does Islamic investing modify portfolio performance? Time-varying optimization strategies for conventional and Shariah energy-ESG-utilities portfolio," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 37-57.
    4. John W. M. Mwamba & Jules C. Mba & Anaclet K. Kitenge, 2025. "Navigating Uncertainty in an Emerging Market: Data-Centric Portfolio Strategies and Systemic Risk Assessment in the Johannesburg Stock Exchange," IJFS, MDPI, vol. 13(1), pages 1-30, March.

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