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The Ramadan Effect: Muslim Stock Markets Rally in Month of Fasting

  • Cecily Hilleary

During the holy month of Ramadan, stock returns are almost nine times higher in predominately Muslim countries than at any other time of the year

Economists have long known that moods, weather, even religious beliefs can affect investor behavior. Now, a new study shows that stock returns during the Muslim Holy Month of Ramadan, vary significantly from those at other times of the year.

Ahmad Etebari is a Professor of Finance and chair of the University of New Hampshire Department of Accounting and Finance. He is also lead author of the paper, “Fast Profits: Investor Sentiment and Stock Returns During Ramadan.” Reporter Cecily Hilleary asked him to explain the so-called “Ramadan Effect.”

Etebari: During the Holy Month, we find that on average, stock returns are almost nine times higher in predominantly Muslim countries than during other times of the year.

Hilleary: That is a tremendous difference—how did you conduct this study?

Etebari: The time period covers 1989 to 2007, and the countries include – there are fourteen countries, just about every country for which we could collect the data included in the study: Those which were predominantly Muslim countries. We set the bar to have at least 50% Muslim population, and on average, they have about 90 or 91 percent predominant Muslims in the countries [sic].

Hilleary: Are there any other factors that could explain these findings, and did you look at these factors?

Etebari: That’s an excellent question, especially looking into factors that affect the return-generating process in the stock market—in other words, factors that affect the stock prices in a conventional sense: Market liquidity, length of the daily fasting period, especially contrasting summer months with winter months when Ramadan coincides with one versus the other, with the length of day being really longer during summer months. We controlled for that. We controlled for liquidity. We controlled for other well-known fixed calendar (we call them Gregorian anomalies), notably, “day of the week” effect, like Monday, “January effect,” “Halloween effect,” and none of those factors explained results.

We also looked at the impact of foreign exchange markets where their currencies were causing that. That did not explain the results either.

Hilleary: How do you explain the findings?

Etebari: Ramadan is really a fundamental shared experience by Muslims. In a sense, it gives Muslims a sense of social identity and it is embraced by just about everyone. The rituals enhance their satisfaction with life and create optimistic beliefs. So, essentially we borrow from research in psychology that shows that religion affects believers’ moods, happiness and risk-taking attitudes.

Hilleary: So happy Muslims make good investments?

Etebari: I would say happy people could undershoot—underestimate--risks.

Hilleary: Obviously there are implications for investors.

Etebari: Indeed.

Hilleary: Are you saying that this could be used as a formula for making some big profits in the market?

Etebari: Always looking into the rear view mirror, you can always make money. But once these opportunities are discovered, it will be harder and harder to detect again, because opportunities get arbitraged out of the market. But the basic implication is that if the past repeats itself, if one could replicate the past, the implication is as follows: Those seeking to gain fast profits, they should try and profit from the [Ramadan] fast, buying shares prior to the start of Ramadan and selling them at the end of the Holy Month or, preferably, immediately after Eid al-Fitr, where our results begin to decline.

Hilleary: There are no guarantees—you’re not handing out guarantees?

Etebari: There’s no such thing as guarantees in finance. This is really what has happened in the past, and any opportunities in the market could close out once they are known by one person or in one market, as I said these opportunities could quickly get or be arbitraged out.