@article {Arslan-Ayaydin136, author = {{\"O}zg{\"u}r Arslan-Ayaydin and Kris Boudt and Muhammad Wajid Raza}, title = {Avoiding Interest-Based Revenues while Constructing Shariah-Compliant Portfolios: False Negatives and False Positives}, volume = {44}, number = {5}, pages = {136--143}, year = {2018}, doi = {10.3905/jpm.2018.44.5.136}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Shariah law prohibits investments in equities of companies for which interest income is a considerable source of revenue. In practice, this is often enforced by prohibiting investments in firms for which the reported interest-based revenues exceed a predetermined percentage of the firm{\textquoteright}s total revenue. In this article, the authors investigate an alternative approach that consists of avoiding firms that are expected to have interest-based revenues exceeding the acceptable threshold over the investment horizon. They compare the traditional backward-looking approach with the proposed forward-looking analysis for a sample of S\&P 500 firms over the period 1984{\textendash}2015. Their results show that the forward-looking approach outperforms the backward-looking approach in terms of both fewer false positives (firms classified as compliant when they are not) and false negatives (firms classified as not compliant when they are).TOPICS: Security analysis and valuation, emerging}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/44/5/136}, eprint = {https://jpm.pm-research.com/content/44/5/136.full.pdf}, journal = {The Journal of Portfolio Management} }