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Developing trading strategies based on fractal finance: an application of MF-DFA in the context of Islamic equities

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dc.contributor.authorGinanjar Dewandaru
dc.contributor.authorRumi Masih
dc.contributor.authorAbul Mansur Mohammed Masih
dc.contributor.authorObiyathulla Ismath Bacha
dc.date.accessioned2016-07-25T18:56:53Z
dc.date.available2016-07-25T18:56:53Z
dc.date.issued2015
dc.description.abstractWe provide a new contribution to trading strategies by using multi-fractal de-trended fluctuation analysis (MF-DFA), imported from econophysics, to complement various momentum strategies. The method provides a single measure that can capture both persistency and anti-persistency in stock prices, accounting for multifractality. This study uses a sample of Islamic stocks listed in the U.S. Dow Jones Islamic market for a sample period covering 16 years starting in 1996. The findings show that the MF-DFA strategy produces monthly excess returns of 6.12%, outperforming other various momentum strategies. Even though the risk of the MF-DFA strategy may be relatively higher, it can still produce a Sharpe ratio of 0.164, which is substantially higher than that of the other strategies. When we control for the MF-DFA factor with the other factors, its pure factor return is still able to yield a monthly excess return of 1.35%. Finally, we combine the momentum and MF-DFA strategies, with the proportions of 90/10, 80/20, and 70/30 and by doing so we demonstrate that the MF-DFA measure can boost the total monthly excess returns as well as Sharpe ratio. The value added is non-linear which implies that the additional returns are associated with lower incremental risk
dc.identifier.citationDewandaru, G., Masih, R., Bacha, O. I., & Mohammed Masih, A. M. (2015). Developing trading strategies based on fractal finance: an application of MF-DFA in the context of Islamic equities. Physica A: Statistical Mechanics and its Applications, 438(15), 223-235. https://doi.org/10.1016/j.physa.2015.05.116
dc.identifier.doihttps://doi.org/10.1016/j.physa.2015.05.116
dc.identifier.urihttps://ikr.inceif.org/handle/INCEIF/1287
dc.languageEnglish
dc.language.isoeng
dc.publisherElsevier
dc.rights2015. Elsevier
dc.sourceCRP
dc.subjectIslamic equity
dc.subjectTrading strategy
dc.subjectMultifractal detrended fluctuation analysis MF-DFA
dc.subjectEfficiency
dc.subjectMomentum contrarian
dc.titleDeveloping trading strategies based on fractal finance: an application of MF-DFA in the context of Islamic equities
dc.typeJournal Article
dlc.maintopicIslamic capital markets
dlc.subtopicIslamic capital markets::Islamic equity market
dspace.entity.typePublication
ikr.doctypeScholarly Works
ikr.topic.maintopicIslamic capital markets
ikr.topic.subtopicIslamic capital markets::Islamic equity market
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