The sun sets over the minarets of mosques on the 12th day of the holy fasting month of Ramadan, in Old Cairo July 21, 2013.AMR ABDALLAH DALSH/Reuters
Investors on the lookout for stock market pricing anomalies have another candidate to add to their list. Research shows that during Ramadan, the holy month of fasting and prayer that is observed by 1.5 billion Muslims, stock markets in predominantly Muslim nations see lower volatility and higher returns.
Co-authored by Jedrzej Bialkowski, Ahmad Etebari, and Tomasz Wisniewski, the study Fast profits: Investor sentiment and stock returns during Ramadan looked at stock market returns in 14 majority-Muslim nations between 1989 and 2007. While it may be unsurprising to see lower volatility – many Muslim nations reduce the work day to six hours during Ramadan – the co-authors found that there was also a dramatic increase in stock market returns.
The mean annualized return realized by investors during the holy month was 38.09 per cent, compared to a rather modest gain of 4.32 per cent throughout the rest of the year, according to the 2012 study published in the Journal of Banking and Finance.
The countries studied were: Bahrain, Egypt, Indonesia, Jordan, Kuwait, Malaysia, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Tunisia, Turkey, and the United Arab Emirates. Combined they have a population of 695 million people.
In an interview with Inside the Market, Dr. Wisniewski from the University of Leicester commented that the Ramadan Effect could be in large part caused by investor psychology in the nations studied. "The social infrastructure changes," he said. "People are more friendly. We think that this more positive mood can positively impact stock market effects." The study goes on to argue that because Ramadan promotes "feelings of solidarity and social identity among Muslims" it leads to "optimistic beliefs that extend to investment decisions."
Seasonal anomalies similar to the Ramadan Effect have been have been observed for a while. In 1942, investment banker Sidney Wachtel published a paper on the January Effect, where small-cap companies have better returns in January because retail investors regularly sell off losing investments in December for tax purposes. Mondays tend to be worse for the stock market because companies often release bad news on the weekend, when fewer people pay attention. A 2004 study published in the Financial Analysts Journal observed that stock market returns between 1946 and 2000 averaged better returns on Rosh Hashanah, a day of celebration, and performed poorer than average on Yom Kippur, the Day of Atonement.
Dr. Wisniewski adds that these observations reflect past performance, and anomalies can prove fleeting as the market becomes aware of them and adjusts accordingly. Even if an anomaly persists, it can often be small enough that transactions costs don't make it worthwhile.
But he believes that the Ramadan Effect is still in place in the predominantly Muslim countries that he studied, and the information is valuable to investors. "If you are an investor, and you want to be rational you want to wait to sell your stocks until after Ramadan," he said. "The anomalies disappear over time. But at the moment, I think the Ramadan Effect is still there."
Ramadan began on June 28 and ends on July 27. The study did not look at the impact on global equity markets as a whole.