This study embodies a preliminary endeavour at analysing the impact of leverage on portfolio behaviour, with specific reference to return and volatility, in the European stock markets, using the debt ratio as one of the important benchmarks for Islamic stock screening. Given the focus of Islamic stock screening on the debt ratio, we use data from 320 firms for eight European countries which were classified according to their level of debt and size. For this, the portfolio optimisation based Mean-Variance Efficient Frontier (MVEF), the Sharpe Ratio and the Capital Market Line (CML) were employed. Our findings tend to demonstrate that, under shocks, high leverage worsens the portfolio return, volatility, and value at risk. The results further point out that optimal portfolio composition is obtained through a high proportion of low debt funds in the case of two separate equity funds, of low debt and high debt portfolios respectively. The systematic risk of several portfolio strategies is further explored with regards to a benchmark of European index and market-wide, return and volatility shocks.

This title examines the resilience of Islamic banking during the global financial crisis and the subsequent recession. Do Islamic financial institutions perform better during periods of financial stress? How do Islamic financial institutions manage risk, given their unique characteristics and the need for Shari'ah compliance? This volume looks at the challenges for Islamic financial institutions in an international post-Basel II system where banks are required to have more capital and liquidity. It also examines the influence of governance on client and investor perceptions and their implications for institutional stability and sustainability.

The impact of leverage on financial market stability and the relationship with the real economy is a key concern among researchers. This paper makes an initial attempt to investigate the relationship between a firm's leverage, return and share price volatility from an Islamic finance perspective and capital structure theory. A multicountry dynamic panel framework and the mean-variance efficient frontier are applied to 320 sample firms from eight European countries, divided into portfolios of low and high debt using the shari'ah screening threshold of 33%. We find that the firm's return and volatility change with changes in the capital structure. Islamic compliant stocks show, in most cases, less volatility than non-compliant stocks but are no different in terms of return. Finally, our results tend to imply a case for limiting debt beyond certain levels.

This study investigates the relationship and shock transmission between firm leverage and systematic risk within the Shari'ah stock screening rules among seven European countries with a sample of 689 firms for the period from 2008 Q2 to 2013 Q1. Due to the fact that high leverage augments systematic risk and accentuates the firm's vulnerability to shocks,debt screening is used to examine the sampled portfolios. As it imposes limits on debt,we examined the impact of such an ethical screening and a risk moderating principle on stock volatility, susceptibility to contagion and the implications for portfolio diversification.Using a vector auto regressive dynamic panel of multi-country framework, systematic risk is analysed by taking into account firm characteristics, country effects, and the heterogeneity across firms, thereby ensuring the robustness of results. Our findings suggest that the systematic risk changes with changes in the capital structure; the Shari'ah-compliant stocks are shown in most cases to carry less risk than conventional stock, while they do not necessarily out-perform in terms of return; during the global financial crisis. We conclude that during the global financial crisis, Islamic compliant stocks demonstrated lower values of systematic risk in the case of "Low Debt" portfolios when comparison to "High Debt" portfolios.