An empirical study on the presence of calendar anomaly in seven stock indices: The Ramadan effect.

Abstract

This dissertation studies the presence of the Ramadan effect in seven stock indices in Islamic and secular countries. The aims of this study are to analyse this effect in such countries with either a majority or minority of Muslims in order to establish whether the Ramadan effect is solely an issue in Islamic countries or if it also affects secular countries; to analyse the impact of Ramadan after the financial crisis in 2008 and to investigate trading activity during the month of Ramadan. The study utilised data on the daily closing stock indices of Saudi Arabia, Pakistan, Qatar, Kazakhstan, Indonesia, the United States and Canada from 5 January 2009 to 9 July 2021, applying Generalised Autoregressive Conditional Heteroscedasticity (GARCH), the Exponential GARCH (EGARCH) and Ordinary Least Squares (OLS) to analyse the Ramadan effect on stock market returns, volatility of returns and trading activity of these seven indices. The findings of this paper revealed some diversities in the effect of Ramadan on stock market returns and volatility of returns. In particular, the effect of Ramadan is positive and significant on the volatility of returns in Saudi Arabia; however, it was found to be insignificant in the other countries. Meanwhile, average returns during Ramadan are negative and significant in Kazakhstan only. Additionally, a reduction in trading activity during Ramadan is only evident in Islamic countries. Also, the study finds that the Ramadan effect cannot be considered an issue for Islamic countries only. It is evident that the level of religiosity of people, religious experiences and the emotions are the reasons behind the existence of the Ramadan effect; hence, building an investment strategy in a country based on these factors is highly recommended.