A Distributionally AI Robust Islamic Portfolio Approach- A Case Study of The Impact of Sanctions on The Incorporation of Chinese Stocks into Islamic ETF

Abstract

Sanctions have long been utilized as a form of forcing the sanctioned countries and entities to change their course and conform to the objectives of the sanction imposing country or entity. Sanctions have been primarily used for trade embargoes and restrictions on the types of goods and services that can be exported from a specific country. Financial sanctions have been instituted primarily in the last century, given the growing importance of the international financial system and interconnection between countries. Furthermore, the role of the US Dollar as the international reserve currency, combined with its extraterritorial legal aspect and the prevalence of US institutions to facilitate cross-border transfers, has made financial sanctions an attractive tool of international coercive action. While the effectiveness of financial sanctions is debatable, they have still been attractive for many nations to be employed. The United States and China have experienced considerable disagreements with respect to their view on trade terms and the exchange of information. This has led to the sanctioning of several businesses by the United States and even forced some corporations to delist from US exchanges. For investors, this poses a significant risk as corporations may be required to delist, which will lead to significant losses. We present a distributionally robust optimization framework for the optimal Islamic portfolio when taking into account the risk of sanctions. The key feature of the framework is that it both integrates Islamic values in addition to ensuring robustness against the impact of possible sanctions. The results demonstrated that the investments are within a limited number of enterprises in order to avoid potential significant downside risks related to sanctions. The framework and study represent an important step towards greater risk assessment of sanctions-related effects on Shariah-compliant portfolios and safeguarding the returns of Islamic ETF investors. This contributes significantly to maintaining Shariah principles that focus on value investment and reduce the risk of fund managers engaging in gambling risks to drive returns.