From Binary Screens to Continuous Compliance: A Shariah Screening Measure for Portfolio Design

Battle Count: 321

The paper is primarily a measurement and portfolio-design contribution rather than a trading signal discovery. CSCI does not command a distinct cross-sectional return premium (Fama-MacBeth coefficients are statistically insignificant). However, it is relevant for quantitative portfolio construction in Islamic equity markets, compliance-aware screening, index replication, and understanding the compliance-diversification-performance trade-off. The methodology could inform systematic portfolio tilts and risk management for Shariah-compliant funds.

The CSCI construction involves piecewise mapping of four financial ratios plus a sectoral factor, with specified thresholds, shape parameters, and multiplicative aggregation. Portfolio backtesting uses standard value-weighted monthly rebalancing with Fama-French factor models. The main complexity lies in accurate sector classification, impure income estimation from Compustat items, and handling the multi-standard threshold mapping. No machine learning or complex optimization is required; the methodology is largely rule-based and transparent.

Data available via WRDS institutional license. Replication code stated to be available upon publication. CSCI construction parameters (thresholds, shape parameters, weights) are fully specified in Tables 3-4. However, provider-specific implementation details (revenue classification, special items treatment, proprietary sector mappings) are not fully observable, limiting exact replication of index membership. The paper uses standard CRSP-Compustat link tables and well-documented timing conventions.