Piety and Profits: Stock Market Anomaly during the Muslim Holy Month * Jedrzej Bialkowski**, Ahmad Etebari***, Tomasz Wisniewski**** Abstract -------------------------------------------------------------------------------------------------------------------- Venerated by more than 1.5 billion Muslims around the world, Ramadan is one of the most celebrated religious rituals in the world. This study investigates daily returns for a sample of 129 Ramadan months for 14 predominantly Muslim countries over the years 1989-2007. The results show that in Ramadan stock returns are on the average noticeably higher, but less volatile, than the rest of the year. The results do not reveal a discernible difference in trading volume between Ramadan and other months of the Islamic lunar year. We find these results consistent with a notion that Ramadan positively affects investor psychology as it promotes senses of solidarity, cooperation, and social identity to Muslims around the world, leading to optimistic beliefs that extend into their investment decisions. JEL Classifications: G12, G14 Keywords: Ramadan Effect, Calendar Anomaly, Investor Behavior, Market Efficiency *: The authors are grateful to Warwick Anderson, Henk Berkman, Magdalena Bialkowska, Glenn Boyle, Timothy Falcon Crack, Mehrun Etebari, Robin Grieves, Ben Jacobsen, Brendan Lambe, Warren McNoe and seminar participants at the University of New Hampshire and University of Otago for their constructive remarks and comments. The authors retain the sole responsibility for all remaining errors. **: Jedrzej Bialkowski, Department of Economics and Finance, College of Business and Economics, Canterbury University, Christchurch, New Zealand; email: [email protected]; tel: 64 9 921 5401 ***: Corresponding author. Ahmad Etebari, Department of Accounting and Finance, Whittemore School of Business and Economics, University of New Hampshire, Durham, NH, USA; email: [email protected]; tel: 1 603 862 3359 ****: Tomasz Wisniewski, the University of Leicester, Leicester, England; email: [email protected]; tel: 44 (0) 116 252 5515 1 Piety and Profits: Stock Market Anomaly during the Muslim Holy Month Abstract -------------------------------------------------------------------------------------------------------------------- Venerated by more than 1.5 billion Muslims around the world, Ramadan is one of the most celebrated religious rituals in the world. This study investigates daily returns for a sample of 129 Ramadan months for 14 predominantly Muslim countries over the years 1989-2007. The results show that in Ramadan stock returns are on the average noticeably higher, but less volatile, than the rest of the year. The results do not reveal a discernible difference in trading volume between Ramadan and other months of the Islamic lunar year. We find these results consistent with a notion that Ramadan positively affects investor psychology as it promotes senses of solidarity, cooperation, and social identity to Muslims around the world, leading to optimistic beliefs that extend into their investment decisions. JEL Classifications: G12, G14 Keywords: Ramadan Effect, Calendar Anomaly, Investor Behavior, Market Efficiency 2 I. Introduction A growing body of recent research shows that security returns respond to variables related to factors such as the weather, biorhythms, beliefs, and social identity.1 For example, Hirshleifer and Shumway (2003) find that daily stock returns are significantly correlated with sunshine. Dowling and Lucey (2005) and Kamstra et al. (2000) document international evidence that seasonal variations in biorhythms and disruptions in sleep caused by changing to and from daylight saving time affect stock returns. Finally, Edmans et al. (2007) investigate the impact of international soccer results and find a significant market decline after losses by national soccer teams in international competitions. These studies are motivated by a set of recent theories that focus on the effects of emotions and feelings on people’s judgments and decision making.2 For example, Loewenstein et al.’s (2001) ‘risk-as-feelings’ theory posits that people’s feelings and emotions often influence their decisions, especially when such decisions involve risk and uncertainty. According to this theory both emotional reactions and cognitive evaluations guide reasoning and decision making, but when they diverge, emotional reactions often dominate behavior and influence the eventual decision (Lowenstein et al., 2001; and Simon, 1967). In line with findings that people in good moods tend to be more optimistic in their judgments than those in bad moods (Wright and Bower, 1992), these studies demonstrate that market prices can be influenced by changes in investor mood even when the underlying events are economically neutral from a direct cost-benefit perspective. In this paper we examine whether a religious practice can, through its influence on investors’ psychology, affect the behavior of the market. The important role played by religion has been                                                              1 For a comprehensive review of the theory and evidence on this line of research, see Shiller (2000), Hirshleifer (2001), and Lucey and Dowling (2005). 2 The impact of investors' mood on their actions is of great interest to researchers in Behavioral Finance. The survey by Subrahmanyam (2007) reviews the developments in this field over the past two decades. 3 highlighted in several earlier studies. Weber (1905) argued that Protestantism has fueled the development of early capitalism. Stulz and Williamson (2003) documented empirically that religion has the power to explain the cross-country variation in creditor rights and the level of enforcement. The extant literature also acknowledges that religiosity can have some bearing on investment decisions of firms and corporate decision-making in general (see Hilary ad Hui (2009)). We endeavor to add to the existing body of knowledge by focusing on the stock markets in countries where religion is an integral part of every day life and determines much of the interaction within the society. More specifically, stock market effects of Ramadan fasting are examined for nations where the majority of population are adherents of Islam. Venerated by more than 1.5 billion Muslims around the world, the Ramadan fasting (“Swam”) is one of the most celebrated religious rituals in the world. The significance of Ramadan is clearly stated in the holy Qur’an: "Ramadan is the month in which the Qur’an was revealed as guidance and clarification to humankind, and a distinction between right and wrong. Thus, whosoever among you witnesses the month should fast it."(Qur’an 2: 185) During Ramadan, with a few exceptions Muslim adults fast each day from before dawn to the onset of night (“iftar”) for roughly 11-19 hours depending on the season in which Ramadan falls. The fast involves abstinence from eating, drinking and other sensual pleasures, as well as strict control of bodily compulsions, instincts, moods and desires of physical forms. Ramadan is a time of reflection, self-reformation, worshiping Allah, giving, spiritual cleansing and enlightenment (Qur'an 51:21; 2:183). During the holy month Muslims are urged to pursue “halal” (good deed) activities by forgetting past differences, forgiving, renewing both human and spiritual relationships and abstaining from “haram” (prohibited) activities. The ultimate goal of Ramadan is to make the individual become a more humane, considerate and responsible member of society. 4 In practice, Ramadan is observed passionately and enthusiastically throughout the Muslim world. During the holy month people become more socially and spiritually oriented. They fast, perform more rituals, read and listen to recitations from the Qur’an, and show greater compassion for society’s underprivileged members.3 Businesses operate as usual, though they tend to reduce or alter work hours in order for people to perform prayers and consume the evening “iftar” meal. Financial markets and banks also alter work hours in observance of Ramadan. Shops and markets re-open and stay open for a good part of the night. During the evening hours, people throng the streets in moods that are festive and communal. They shop, dine, and spend time with family and friends. As a fundamental, shared experience, Ramadan brings about a greater solidarity and cooperation among Muslims throughout the world. A major contributor to this effect is the greater social support provided within the community and also the closer relationship the individual Muslim establishes with Allah, which in itself is a critical form of social relation. As indicated by research in positive psychology, religion provides a valuable form of social support, encourages optimistic beliefs, and contributes to the believers’ happiness (Beit-Hallahmi and Argyle, 1997). The collective enthusiasm derived from Ramadan leads to a heightened sense of social identity and greater satisfaction with life for Muslims around the world. This satisfaction in turn can lead to a greater willingness for the followers to accept risk (Turner, 1974). The process of Ramadan-type fasting itself can substantially benefit the health of the devotee. As mentioned in the Qur’an and also supported by clinical research, fasting promotes both the physical and mental well-being of most practicing Muslims (Böck et al, 1978; Fazel, 1998; Perk et al., 2001; Saleh et al., 2005). Clinical research shows that the Ramadan fasting generally makes people                                                              3 Numerous sources report that during Ramadan the spirit of giving is at an all time high. For example, see Safaa Abdoun, “The Spirit of Giving during Ramadan,” September 19, 2008, Daily News, Egypt.  5 less tense or anxious (Daradkeh, 1992) and that it may also induce mild states of euphoria (Knerr and Pearl, 2008). We will discuss this evidence further in the next section of the paper. We postulate that the euphoria derived from Ramadan could influence investor behavior in Islamic markets. We hypothesize that the upbeat mood during Ramadan leads to positive investor sentiment and has a positive valuation effect on equity markets in Islamic countries. Mood aside, the demand for equities may also increase as a result of the favorable health status enjoyed by the local Muslim investors. Rosen and Wu (2004) report that households in good health are inclined to hold a greater share of risky assets in their portfolios. In light of the foregoing discussion, we would expect the Ramadan period to coincide with notable increases in the prices of risky securities. The present study is a comprehensive examination of stock returns for a broad sample of 129 Ramadan months for 14 predominantly Muslim countries over a period lasting from 1989 to 2007. The results show that during Ramadan stock returns are on the average much higher and less volatile compared to the rest of the year. The results also show that there is no discernible change in trading volume between Ramadan and other months of the Islamic lunar year. We find these results consistent with our prior expectation that Ramadan has a positive impact on mood and hence on investor sentiment. We believe the results are unrelated to well-documented calendar anomalies such as the ‘January effect’ or the ‘Turn-of-the-Week effect’ because the dates of Ramadan change each year. Ramadan is the ninth month of the Islamic lunar calendar, a calendar that contains twelve months each starting with the sighting of a new moon. As explained later in this paper, the Islamic lunar year is approximately 11 days shorter than the Gregorian solar year. So, over time, Ramadan does not coincide systematically with a fixed day or season in the Gregorian calendar. We specifically test for the presence of any Monday, January or Halloween effects, but we find that neither explains the results. 6 The remainder of this paper is organized as follows: Section II presents a discussion of the literature on the health benefits resulting from fasting and the evidence of the market effects of religious festivities. Section III outlines the data set and the data collection procedures. Section IV discusses the results, whereas Section V examines the robustness of these results. The last section concludes the paper. II. Related Studies of Fasting and Religious Festivities This section consists of two parts. The first part is a review of the clinical research into the health effects of fasting. In the second part, we review the evidence on the effects of Ramadan on the Islamic stock markets, as well as the effects of other holidays on markets elsewhere around the world. IIa. The Ramadan Fast and Its Health Benefits Ramadan is one of the holiest months of the Islamic calendar. Fasting (“Swam”) is the most prominent event in Ramadan. Along with the testimony of faith (“Shahadat”), ritual prayer (“Salat”), almsgiving (“Zakat”), and an once-in-a-lifetime pilgrimage to Makkah (“Hajj”), fasting during Ramadan is one of the five pillars of Islam.4 As an expression of penance for sins and gratitude for the blessings enjoyed during the past year, an observant Muslim fasts during the holy month (Wagtendonk, 1968). Throughout this period, a follower of Islam has to abstain from ingesting food and liquids between sunrise and sunset. With a “Suhoor” pre-dawn meal and an “iftar” supper the consumption becomes entirely nocturnal. The sick, the elderly, travelers and women who are pregnant, breastfeeding or menstruating are exempt. They can make up for the missed days of fasting at a later date. Should it prove                                                              4 These five practices are essential to the Sunni sect. Shi'ite Muslims also subscribe to more ritual practices that overlap with the five Pillars. 7 impossible due to an ongoing or chronic illness, they can pay a compensation called “Fidyah”, which is usually equivalent to feeding a hungry person who is in financial difficulties. Others who are exempt include young children and the insane. With the notable exception of the aforementioned groups, Ramadan-type fasting5 can have a wide range of beneficial effects for health. Although in the initial stage of fasting individuals may experience a feeling of discomfort, this symptom typically abates after the second day of the fast. Proponents of natural medicine argue that it arises as a by-product of the detoxification process, in which the toxins previously stored in fatty tissues are expelled from the body (Fuhrman, 1998). Fasting also provides a respite to the digestive tract and allows for the elimination of the superfluous tissue. A number of clinical studies have reported a reduction of body weight and waist circumference in subjects under controlled fasting conditions (Böck et al. 1978; Fazel, 1998; Perk et al., 2001; Saleh et al., 2005; Bouhlel et al., 2008). The ramifications of this observation for the cardiovascular system and oxygenation are immense. Moreover, Saleh et al. (2005) report a significant reduction in total cholesterol and LDL-cholesterol in male subjects, as well as a decrease in the atherogenic index for the whole sample during the fast of Ramadan. Not only can the periodic food deprivation alter the state of consciousness, but it can also promote mental wellbeing. Having investigated the clinical effects of fasting therapy on a large sample of patients with psychosomatic and mental diseases, Yamamoto et al. (1979) conclude that it was efficacious in 87% of the cases. Symptoms of disorders such as conversion hysteria, depression, anxiety neurosis and hypochondriasis had been significantly alleviated by fasting. In a follow-up study, Yamamoto (1980) monitored the electrical activity of the brain in fasting subjects by placing electrodes on their scalp. This electroencephalographical (EEG) analysis revealed that fasting                                                              5 The term “fasting”, as used in this paper, describes a fasting-refeeding cycle with two meals being consumed daily. Under no circumstances do we try to claim that total abstention from food leads to health improvements in the long- run, nor that it should be recommended as a treatment for serious medical conditions.   8 increases the percent energy of alpha waves, while simultaneously reducing the percent energy of beta. The observed fall in the frequency of rhythmic activity indicated that patients became less anxious and tense. In view of these findings, it is perhaps unsurprising that the number of reported suicide attempts drops during the month of Ramadan (Daradkeh, 1992). Many of those who fast tend to experience mild states of euphoria. As the human body enters into a fasting mode, its stores of glucose are progressively used up. Ketone bodies produced in the liver start to supplant glucose as an energy source for the brain (Knerr and Pearl, 2008). Interestingly, one of the ketone bodies β-hydroxybutyrate is an isomer of GHB (γ-hydroxybutyrate), which is known to the medical profession as an antidepressant and is also used illegally by some people as a mood-enhancing drug. Noting the structural similarities between the abovementioned ketone body and GHB, Brown (2007) hypothesizes that they may have comparable effects on the brain, which would explain the diet-induced euphoria. IIb. Previous Studies of Religious Festivities Numerous studies have examined security returns for the presence of recurring seasonal patterns in the Gregorian calendar. Among other findings, these studies report persistent anomalous returns around the turn of the week, the turn of the month and the turn of the year (for example, see Lakonishok and Schmidt (1988)). However, there are only a few studies that investigate the market effects of non-secular festivities such as Ramadan. In this section we present a brief overview of the more relevant research. Hussain (1998) examines mean returns and return volatility in Ramadan for the Pakistan stock market over the years 1989-1993. This study finds no change in mean return, but a significant decline in return volatility during the weeks of Ramadan. Seyyed et al. (2005) conduct a similar investigation for the Saudi Arabian stock market for the period 1985-2000. Similar to Hussain 9 (1998), they find no significant change in mean return but a noticeable decline in volatility. Both papers attribute their results to a likely price of risk anomaly during Ramadan. Ours is a more comprehensive study, which includes a cross-section of countries observed over a longer period. Perhaps more importantly, it is also the first one to document robustly the existence of an effect in the mean returns during the period of holy month. A related stream of research is the literature on the effects of religious holidays and other national festivities. Lakonishok and Smidt (1988), as well as Ariel (1990) and Cadsby and Ratner (1992), report that independently of other calendar-based anomalies stock returns tend to increase prior to public holidays during which markets are closed. These holidays include Christmas and Good Friday, two important religious holidays. In a similar study, Frieder and Subrahmanyam (2004) test the effect of Jewish sentiment on the U.S. equity market by examining return and volume around major Jewish High Holy Days on which the stock market remains open. This study finds that stock returns are significantly up on Rosh HaShanah (a festive day, commonly known as the Jewish New Year) and the prior two days but significantly down on Yom Kippur (a somber day) and the day after. For both Holy Days, Frieder and Subrahmanyam (2004) report a decline in the volume of trading.6 Frieder and Subrahmanyam (2004) attribute their results to the sentiment of Jewish investors and their trades around these holidays. Ramadan is an uplifting holiday for Muslims as is Rosh HaShanah for Jews. Like Rosh HaShanah, Ramadan is a period capable of influencing the moods and decisions of the adherents. During Ramadan participating Muslims seek a closer relationship with Allah and follow a set of prescribed standards of behavior intended to make them become better Muslims and more responsible members of society, which can improve their feelings of self-worth. Thus, we expect                                                              6 Frieder and Subrahmanyam (2004) also analyze market data around the Christian Feast Day of St. Patrick and find results similar to those they report for Rosh Hashanah. 10