Ramadan Effect: A Structural Time-Series Test

Abdullah Al-Awadhi,Ahmad Bash,Fouad Jamaani

doi:10.5430/ijfr.v12n1p260

Abstract

This study investigates whether religious belief creates stock market return seasonality, focusing on the Muslim holy month “Ramadan". We use long-term data from 12 stock markets in countries with a high Muslim majority. Using a structural time-series model that takes into account a “trend component" and a stochastic “seasonal component”, we find no significant evidence of Ramadan return seasonality for the 12 stock markets over the long-term. This result suggests that there is no trend component for Ramadan effect and that Ramadan returns seasonality vanish in the long-term.

Highlights

It is stated that the religious experience of Muslim investors during Ramadan leads to a positive sentiment and moves the market to higher returns
The findings are inconsistent in relation to the appearance of “Ramadan" return seasonality with long-term data (Note 1) in markets with a Muslim majority, such as Bahrain, Turkey, Egypt, Jordan, Kuwait, Qatar, Malaysia, Oman, Pakistan, Saudi Arabia, United Arab Emirates and Indonesia (e.g., Almudhaf, 2012, Bialkowski et al, 2012, Al-Khazali, 2014, Al-Awadhi, 2019)
Using long-term data and a structural time-series model, we find that none of the 12 markets in countries with a Muslim majority provide significant evidence of Ramadan return seasonality in terms of absolute returns

Summary

Introduction

Religion can influence investors’ behaviour (e.g., Durand et al 2013, Canepa and Ibnrubbian, 2014, Al-Awadhi and Dempsey, 2017) and may lead to stock market return seasonality (e.g., Frieder and Subrahmanyam, 2004, Białkowski et al, 2012). The findings are inconsistent in relation to the appearance of “Ramadan" return seasonality with long-term data (Note 1) in markets with a Muslim majority, such as Bahrain, Turkey, Egypt, Jordan, Kuwait, Qatar, Malaysia, Oman, Pakistan, Saudi Arabia, United Arab Emirates and Indonesia (e.g., Almudhaf, 2012, Bialkowski et al, 2012, Al-Khazali, 2014, Al-Awadhi, 2019). This inconsistency could be an outcome of not paying attention to the changes in market trends during financial crises (Hui, 2005, Al-Khazali, 2014).

Literature Review and Hypothesis Development

Methodology

Results