New research from the University of New Hampshire found that stock returns are almost nine times higher in predominately Muslim countries during the holy month of Ramadan compared to other times of the year. The research suggests that Ramadan may positively affect investor psychology and may lead to optimistic beliefs that extend to investment decisions.
“Ramadan is an uplifting holiday for Muslims,” said Ahmad Etebari, professor of finance and chair of the UNH Department of Accounting and Finance, who conducted the research. “Muslims seek a closer relationship with Allah, follow a set of prescribed standards of behavior and try to become more responsible members of society. As a shared experience, Ramadan brings about a greater solidarity among Muslims, which can improve their feelings of self-worth. The holy month produces an upbeat sentiment and greater satisfaction with life, which we believe leads to overconfidence and a greater willingness to accept risk by Muslim investors.”
The researchers investigated stock returns during Ramadan for 14 predominantly Muslim countries from 1989 to 2007. The sample includes countries for which stock market index data was available from Morgan Stanley Capital International (MSCI) in Datastream and in which the proportion of the population professing Muslim faith exceeded 50 percent.
Stock returns are almost nine times higher and less volatile than during the rest of the year. The mean annualized return realized by investors during the holy month was 38.09 percent, compared to a rather modest gain of 4.32 percent throughout the rest of the year, the researchers found.
Etebari said the study’s results are independent of market liquidity, length of the daily fasting period and some well-known fixed calendar anomalies, notably the Monday, Jan. and Halloween affects. Ramadan is the ninth month of the Muslim lunar calendar, which unlike the Gregorian Western calendar, is based on the motions of the moon.
“You might expect the market to be down during Ramadan because the Muslim community is fasting and activity level might be down,” said Etebari. “But even during Ramadan months that coincided with summer, when days are long and fasting can be an ordeal, stock prices were actually up.”
Thus, the authors conclude that “Investors seeking fast profits in the Muslim world should try to profit from the fast, buying shares prior to the start of Ramadan and selling them at the end of the holy month.”
Sarah Wolper, an associate professor of history at UNH who teaches a course in Islamic studies, said she thought the researcher’s observations were “astute.”
“Ramadan is the most pious month of the year for Muslims,” she said. “It is the month when the Qur’an was revealed. They feel happier and closer to their god, so [this research] makes sense.”
Wisniewski said that this research reflects a growing trend in research in behavioral finance – that is to say that investor’s feelings and moods affect their decisions.
“The science of finance has evolved substantially over the last several decades,” said Wisniewski. “Many researchers have realized that stock prices are not solely driven by changing fundamentals, such as corporate earnings and dividends, but also by the sentiments of the investing public. Formation of stock market bubbles and excessive volatility of asset prices seem to attest to this fact. Consequently, to understand why stock prices fluctuate we have to analyze the mindset of market participants.”
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