A Market Timing Strategy for the GCC Conventional and Shariah Stock Indices

This paper defines and assesses a market timing strategy for the Gulf Cooperation Council (GCC) stock indices, namely the Tadawul All Share Index, FTSE Abu Dhabi General Index, Qatar All Share Index and Qatar Al Rayan Islamic Index. The strategy intends to deliver a consistent reduction in volatility and better risk-adjusted performance. The present empirical study capitalises on the work by Colepand and Copeland (1999) on the US market, re-proposed recently by Bantwa (2020) on the Indian market, which resorts to implied volatility as the trigger to adjust the asset allocation. The strategy hereby proposed is modified considering the higher volatility of the GCC financial markets as well as its preeminent goal – risk-adjusted performance optimisation. Moreover, the implied volatility is unavailable for the GCC stock indices under assessment; therefore, it has been replaced with the forecasted volatility obtained through asymmetric GARCH models (GJR-GARCH), one for each stock index. The active strategy in question is backtested on both the conventional and Islamic stock indices to check whether it overperforms the passive strategy equally well on both types of indices. The empirical findings encourage the adoption of volatility-based market timing models in additional emerging markets and Islamic indices.