Seasonality Effect and Market Efficiency Anomalies in the Saudi Stock Market

Chapter 1: Introduction
Both financial and non-financial activities have a significant effect on the performance of the stock market. In any calendar year, there are always religious-related anomalies and non-religious related anomalies in the financial market. Non-religious related anomalies include the January effect and the weekend effect, while the religious ones include the Good Friday effects, Christmas effect, Ramadan effect, and the less popular Ashoura effect (Bialkowski, Etebari, & Wisneiwski, 2012). One unique feature of the Ramadan effect is that besides affecting the moving calendar due to abnormal returns, it has a significant impact on investors, which ultimately result in significant effects in the market. There are effects on investors’, who are also believers’ health due to the prolonged fasting period, as well as in their social empathy and feelings due to the religious activities. Additionally, most worshippers become inclined to do good deeds, including not defaulting on their payments (Bialkowski et al., 2012). Unlike Ramadan, which is associated with good feelings, due to the anticipation of blessings, Ashoura is associated with negative valence due to worshippers’ anger and sadness. This paper explores whether Ramadan, Ashoura, and Hajj festivals have any impact on the stock market returns and trading volumes of the Saudi stock market.
According to Bialkowski et al. (2012), investors’ mood and emotion affect their judgments in decision making, preference for risks and returns, and their responses to uncertainties in the market. In conformity, Loewenstein et al.’s (2001) theory, ‘risk-as-feeling,’ espouses that uncertainties and risks influence individuals’ decision-making process. The risk-a-feeling theory, suggests that cognitive evaluations and emotional reactions influence a person’s reasoning. However, when there is a divergence between the two, emotional reactions usually supersede behavior and influence a person’s decisions. Based on this theory, Al-Khazli et al. (2017) opine that people with good moods are usually more optimistic than those who are moody. In this regard, market prices and returns on investments can be influenced by investors’ emotional state, which can lead to market anomalies.
Another theory that supports the idea that religious activities can have an impact on market performance is that of behavioral finance. Al-Kazali el al. (2017), note that investor’s financial decisions are not always rational, and are influenced by among other things how they feel. In agreement, Nofsinger (2005) says that social mood influences investors’ decisions, and also business activities. Since the movements of stock markets are influenced by actual business performance and investors behaviors, which are affected by their attitudes and perceptions, then they can be viewed as a direct index of social moods (Al-Kazali, Bouri, & Zoubi, 2017). Therefore, the different social environment, behaviors, and activities, such as religion and sports have an effect on investors decisions (Hilary & Hui, 2009).
Al-Kazali, Bouri, and Zoubi (2017) note that religion has for a long time affected and influenced the economic performance of a region. For example, the development of the modern capitalistic economic model is associated with the development of Protestant ethic (Weber, 1905). Religion has also been found to affect social interactions, individuals and corporations’ social norms on investments (Sonjaya & Wahyudi, 2016). Likewise, Al-Kazali et al. (2017) assert that religious beliefs influence how investors select their portfolios in Saudi Arabia.
Although various research studies have examined the effects of religious beliefs on stock market performance, few have focused on Saudi Arabia alone (Bialkowski et al., 2012; Hilary & Hui, 2009). Furthermore, there has been a contradiction in the result findings, specifically on the effects of Ramadan on the performance of stock market. Among some researchers, Ramadan does not affect the performance of the stock market, while others have established that it does have some effects in some countries. In this paper, we will examine whether religious practices and specifically Ramadan and Ashoura festivals influence investors’ psychology, in turn affecting the market’s behavior. The existing body of literature indicates that religion can indeed economic performance by influencing the investment decisions, and decision-making process of person’s and institutions (Al-Kazali et al., 2017). This research aims at expanding the existing knowledge by examining Ramadan and Ashoura effect on Saudi’s stock market.
In financial markets, anomalies refer to the tendency of stocks to deviate from the notion of an efficient market. In this case, the movements of the stocks do not reflect all the available information in the market. Both the Ramadan and Ashoura are essential Muslim holy days that are observed by a majority of Muslim populations. The psychological and physical effects that investors experience during this period have a significant impact on how they invest. In particular, these religious ceremonies affect investors’ level of optimism, appetite to take risks, and desire to invest.
Ramadan is one of the most sacred festivals among Muslims, and it happens in the 9th month of the Hijriyah. Ramadan involves abstinence from any forms of pleasures such as drinking, eating, and sexual satisfaction during the fast hours. According to the Quran 51:21; 2:183, Ramadan is a time of reflection, worship, giving, and self-reformation. Therefore, Ramadan fosters cooperation among Muslims in the world through enhanced social cooperation and worshippers’ closer relationship to Allah. Beit-Hallahmi and Argyle (1997) use the positive psychology concept, to establish that religion provides important social support that makes believers more optimistic and happy. Importantly, the enhanced enthusiasm among the faithful’s results in a greater sense of self-identity and satisfaction among Muslims in the world.
On the tenth day of the first Hijri month of Muharram, there is always the Ashoura festival. This ceremony is celebrated by both Sunni and Shia Muslims, albeit with different reasons. Among the Shi’a Muslims, Ashoura marks the martyrdom of Hussein ibn Ali and 72 Husayn’s followers at the Battle of Karbala on Ashoura (Schwartz, 2015). Hussein ibn Ali was the grandson of Prophet Mohamad. While among the Sunni’s Ashoura is the commemoration of the day when Moses liberated Israelites from Pharaoh and his army. Therefore, Sunni’s fast on this day to follow the teaching of prophet Mohamad. Despite the Ramadan and Ashoura being essential and highly celebrated holy occasions for Muslims, they vary on how they affect investors’ attitudes. The Ramadan festival is characterized by positive valence since Muslim faithful’s anticipate blessings in the month due to the forgiveness of their past sins. On the converse, Ashoura is characterized by negative valence due to the sadness of mourning.
Among Islamic countries, such as Saudi Arabia, religious practices have three distinct characteristics. Firstly, the Muslim Hijri calendar regularly differs from the Gregorian calendar. Since the Muslim Hijri year is 11 days shorter than the Gregorian year, the days when the Muslim holidays are occurring are always shifting each year when looked in the Gregorian calendar. Therefore, although the Islamic holidays may appear to be happening at the same time in the Hijri calendar, they may be shifting by many days in the Gregorian calendar. Just consider, the 11-day difference per year is equivalent to 220 days in 20 years, which is about seven months and ten days difference. Noteworthy, most societies have their calendar due to their religion and cultural practices. For example, Chinese follow the lunisolar calendar, Jews follow the Hebrew calendar, Christians follow the Gregorian calendar, and Indians follow the Saka calendar (Al-Kazali, Bouri, & Zoubi, 2017).
Secondly, Muslim countries do not have a similar method of determining the start of lunar Hijri months. Each Muslim country uses the independent method of ascertaining the beginning of a lunar month ranging from eyewitness observations of the new crescent to the uses of advanced astronomical tools (Al-Ississ, 2010). Even among countries that use astronomical instruments, various parameters are used to calculate the lunar positions, which results in varying dates for the start and end of Islamic holy days in the Hijri year across Muslim countries.
Thirdly, there are different degrees of worship intensity within the Ramadan month, which affect investors’ emotions differently (Al-Ississ, 2010). During the Ramadan, the worship intensity varies depending on the religious significance of each event. The Ramadan consists of three distinct parts that are 10 days each but have different characteristics, motives, intensity of worship, and promised reward (Ibn Khuzaymah, 3). In the first part of Ramadan, worshippers seek God’s Mercy, in the second part, the seek God’s forgiveness, and in the third part, they pray for delivery from hellfire (Ibn Khuzaymah, 3:191). The physical strain, which is usually experienced at the start of the fasting before the worshippers acclimatize to their new routines, affects their behaviors. Additionally, the varying worship intensities, motive, and characteristics of each part of Ramadan have different psychological effects on the worshippers.
Besides prayer and fasting during Ramadan, many Muslims honor the ceremony by reducing the hours that they work per day, which enables them to observe their religious duties. Bialkowski et al. (2012) note that the performance of religious duties by the worshippers makes them intensify their social interactions and become more optimistic. Nonetheless, the reduced working hours also results in a reduction in the productivity of these individuals.
Conceptually, the effects of Ramadan on the performance of financial markets depends on the psychological status of the investor and also his/her emotions. Since Ramadan affects both the spiritual and social interactions of Muslims, it inevitably changes their psychology, in turn influencing their investment decisions. In the Ramadan period, Muslims are usually more social and religious, because they expect to be rewarded in the double portion for their good deeds. Lucey and Dowling (2005) assert that the social and religious orientation create positive moods among the worshippers, in turn affecting their willingness to take risks and invest. Similarly, Seyyed, Abraham, and Al-Hajji (2005) opine that there is a significant decline in volatility during the Ramadan period, which is attributed to investors’ positive sentiments. In support, Baele, Farooq, and Ongena (2012) opine that loan defaults and adverse economic actions are not likely to occur during the Ramadan period.
It has been established that the fasting period and prayer promote both physical and psychological well-being of individuals, which results in a reduction in anxiety among the worshippers (Saleh et al., 2005). According to Rosen and Wu (2004), the worshippers’ good health during the Ramadan period can enhance their willingness to take risks. Similarly, Bialkowski et al. (2012) note that fasting causes a person to be healthy and makes him/her have a positive mood, which makes an individual to increase his/her risk appetite.
Although the Ramadan effect is associated with positive returns in some countries, Bahrain and Saudi Arabia consistently show negative returns during this period (Sonjaya & Wahyudi, 2016). From Seyyed, Abraham, and Al-Hajji (2005), examination the Ramadan effect on the Saudi Arabian stock market, it was established that there was a significant decrease in volatility and trading activity during this period (Shah & Ahmed, 2014, pp. 4715). A report from Aljazira Capital (2014), concludes that there is a substantial and positive relationship between Saudi Arabia stock Exchange market movements and Ramadan. In particular, it was observed that a high number of individuals spent time in spiritual activities and rituals, and they changed their business hours to accommodate the requirements of Ramadan. Aljazira Capital (2014) notes that just before Ramadan, most individuals spend a lot on shopping for the upcoming festival. These individuals usually exit the market leading to a fall in indices. During Ramadan, the trade volume is low since fewer people invest in the stock market. There is usually a rally of the indices and market dynamics after Ramadan due to increased participation in the market.
Importance of this Research
This paper complements other research studies that have examined the effects of Ramadan, Ashoura, and Hajj festivals on the performance of financial markets in Saudi Arabia. Considering the fact that Muslims strongly condemn speculation and gambling (maysir), foreign non-Muslim investors who consider speculation as a form of risk, which earns a reward, will benefit from the information about the financial market trends in Saudi Arabia that will be derived by this study. This research uses the GARCH-based model to capture many salient features from data such as the effects of days of the week and the predictability associated with lagged returns. Consequently, the three different distributions of the GARCH model (normal, student-t, and GED) are examined, and the one that is most appropriate is selected. This tactic helps in avoiding bias estimates of return and volatility coefficient, which can result in erroneous investment conclusions. The remainder of the paper is organized in the following manner: Chapter 2 offers a review of relevant literature; Chapter 3 describes the data and methodology; Chapter 4 discusses the findings of the research; Chapter 5 gives the conclusion and appropriate recommendations based on the research findings.
Chapter 2: Literature Review
Anomalies occur when stocks deviate from the notions of an efficient market, which makes investors earn abnormal returns (Stulz & Williamson, 2003). There are two groups of anomalies in financial markets, religious related anomalies and non-religious related. The religious related anomalies include the Christmas and Good Friday effects, the Easter Week holiday effect, the Ramadan effect, and the Jewish High Holiday effects. Non-religious-related anomalies include the January effect, the Weekend effect, and the Wednesday effect (Sonjaya & Wahyudi, 2016, p. 55). As for Ramadan effect, besides the significant effects of the moving calendar that result in abnormal returns, a combination of factors that are not in other religious-calendar anomalies affect returns during this period. According to Bialkowski et al. (2012), investors’ emotions and psychological status influence their decision making, risk appetite, and response to uncertainties.
From a research done on the effects of Christmas and Good Friday on financial markets, Cadsby and Ratner (1992) observed that stock returns increase just before the start of these public holiday. Similarly, a research conducted by Frieder and Subrahmanyam (2004) on the effect of the Jewish High Holy Days established that stocks are significantly up during Rosh HaShanah and prior two days and significantly low on Yom Kippur and subsequent days. Noteworthy, Frieder and Subrahmanyam (2004) associate the low returns with the sentiments of the Jewish investors and their trade during holidays. Aljazira Capital (2014, p. 4) also note that in Saudi Arabia, indices fall in the period just before Ramadan since most investors exit the market. The indices remain low during the Ramadan period, and they rise steadily after Ramadan.
            Ramadan occurs during the ninth month of the Muslim Hijri calendar. This important holiday is observed by more than 1.5 billion Sunni and Shi’a Muslims around the world (Bialkwoski et al., 2012). During this period, Muslims must refrain from drinking, eating or sensual pleasures. In principle, Muslims are expected to commit most of their time to religious practices and rituals. They mostly fast from dawn until sunset. Muslims also put more emphasis on prayer, charity, and reciting the Quran during this period, since they believe they will receive blessings for their good deeds. One major characteristic of Ramadan is the shared experience among the worshippers during the prayer and fasting period, which is essential for enhancing social relations. Therefore, when viewed from a positive psychology perspective, Ramadan provides crucial social support and encourages optimistic beliefs that are essential in enhancing believers’ happiness (Beit-Hallahmi & Argyle, 1997). Importantly, these optimistic beliefs can influence the worshippers’ investment decisions and risk appetite.
The Ashoura festival occurs on every tenth day of the first Hijri month of Muharram (Schwartz, 2015). Both the Sunni and Shi’a Muslims celebrate this holiday. Among the Sunnis’ Ashoura acts as the commemoration of the day of Israelites liberation from Pharaoh and his army. For the Shi’a, they mourn the death of Hussein ibn Ali at the Battle of Karbala on Ashoura. Hussein was the grandson of Prophet Mohamad.
Although Ramadan and Ashoura are important Muslim holidays’, they have a significant difference in valence. In Ramadan, individuals have positive valence since they anticipate blessings and forgiveness. Whereas in Ashoura, individuals have a sad feeling since they commemorate difficult times that Islam has experience. In this case, Sunni’s celebrate the day Israelites were liberated from Pharaoh and his army, and the Shi’a, mourn the death of Hussein ibn Ali. Accordingly, Ramadhan and Ashoura are expected to have different psychological effects on their members, which makes these holidays to also have varying effects on the performance of the financial markets.
Hajj is an annual Islamic pilgrimage held in Mecca, Saudi Arabia. Mecca is considered as one of the holiest cities for Muslims, and Hajj is a compulsory duty that must be conducted at least once in a lifetime by a financially and physically capable person. The Hajj is the second largest annual festival in the Muslim world. Attendees to these pilgrimage are expected to be able to support their families and themselves during the Hajj period, which usually occurs from the 8th to the 12th date of the Dhu-al-Hijjah in the Hijri calendar. Among the Muslim faithful’s, the Hajj demonstrates their submission to Allah.
During the Hajj, the pilgrims’ processions converge in Mecca where they perform a series of rituals. In particular, each individual walks seven times around Kabaa, takes a drink from Zamzam well, performs symbolic stoning of the devil by throwing stones at three pillars. The pilgrims also run several times between the hills of Safa and Marwah. They also go to Mount Arafat, and spend their night at the plain of Muzdalifa. After conducting these rites, the pilgrims shave their heads, make an animal sacrifice, and finally celebrate Eid al-Adha for three days. The sacrifice of animals plays an important role of commemorating the sacrifice made by Prophet Ibrahim, which is called ‘Sunnat-e-Ibrahim.”
One major similarity between Ramadan, Ashoura, and Hajj festivals is that Muslims allocate more of their time in spiritual development, and slow down their investment activities. Additionally, these ceremonies lead to an emergence of new short term business opportunities, especially in the consumer industry, which attract more investors. These new investment opportunities result in significant cash outflow from the stock market. The reduced participation in the stock market by most investors coupled with some cash outflows from the market results in low returns and volatility in financial markets. Therefore, the herding behavior during both the Ramadan, Ashoura, and Hajj makes stocks to have low returns during these festivals (Shah, Qureshi, & Aslam, 2017, p. 58).
Religious Calendar and Financial Market
Islamic Holy days follow the lunar Islamic (Hijri) calendar, and the not solar Gregorian calendar, which is used in most business operations. Since the months of the Hijri calendar are always about 29.53 days, it is approximately 11 days shorter than the Gregorian calendar. As a result, although the Muslim ceremonies such as Ramadan and Ashoura occur in the same period in the Hijri calendar, they are always shifting in the Gregorian one.
Since the Hijri calendar uses the lunar system, the observations of the moon indicate the start of a new month. Usually, if the new moon occurs before sunset, the Ramadhan holiday starts on the following day (Bialkwoski et al., 2012). The observation of another new moon also marks the end of Ramadhan. The main challenge with using this method is that the visibility of the moon and sunset time are dependent on the date and geographical location of the observer. In the case where astronomical calculations are used, there are also challenges since different parameters are used to calculate the start of the Islamic holidays. From a religious perspective, it is not unique for Muslims to use their faith-based calendar (Bialkwoski et al. 2012). For example, Indians follow the Saka calendar, Jews use the Hebrew calendar, the Chinese use the lunar calendar, and Christians follow the Gregorian calendar (Al-Kazali, et al., 2017).
Ramadhan, Ashoura, and Hajj Effects on Investors
Ramadan has been found to result in the development of positive moods among investors, which makes them more willing to take risks and invest. The increased optimism among investors is mostly shown through a significant increase in stock returns during Ramadan (Al-Kahazali, 2014; Bialkowski et al., 2012). Saleh et al. (2005) opine that the fasting enhances investors’ health, which makes them more willing to participate in risky trade. Bialkowski et al. (2012) assert that the communal worship promotes optimism, herding behavior, and enhances social interactions. Concerning herding behavior, based on social norm theory, people are likely to follow the activities, norms, and beliefs of their community members. Therefore, the religious events of the entire community can influence the behavior of individual investors affecting their investment patterns.
Normally, Ramadan plays a significant role in influencing investors’ willingness to take risks (Hilary & Hui, 2009). The fasting, refraining from drinking, smoking, and sexual behavior, and engaging in religious practices is done by all Muslims in the world from dawn until sunset (Al-Khazali, 2014). Importantly, fasting makes individuals become healthier and reduces their anxiety level. In support, Rosen and Wu (2004) argue that persons who are healthy are usually more willing to participate in risky portfolios. Additionally, the holding of communal prayers enhances social interactions and optimism during Ramadan (Bialkowski et al., 2012). The heightened social interactions during Ramadan makes investors more optimistic and less risk-averse. Sonjaya and Wahyudi (2016, p. 58) note that these social interactions result in a herding behavior, which ensures other investors in the market follow this behavior.
Studies on the performance of stock markets in Islamic countries during the Islamic year have given mixed responses (Seyyed et al., 2015; Al-Ississ, 2012; Bialkowski et al., 2012, Aljazira Capital, 2014). These studies investigated whether the Islamic calendar led to seasonality effects and market efficiency anomalies in Islamic countries. Specifically, some research findings indicate higher stock returns and volatility during Ramadan, other showed low returns and volatility, while others reported there were no significant market changes. The variations in the research findings were also similar for Ashoura, with researchers finding different results.
Studies conducted on the Ramadan effect on the stock market give different findings. Overall, it is agreed that the impact of Ramadan on financial markets is due to investors’ psychological and emotional state. Bialkwoski et al. (2012) and Al-Khazali (2014) espouse that stock returns are usually higher during the Ramadan period because of investors’ optimism. Similarly, Seyyed, Abraham, and Al-Hajji (2005) note that there is a decline in volatility during the Ramadan period. On the contrary, (Sonjaya and Wahyudi, 2016, p. 57) observe that Ramadan effect does not result in the rise in stock market performance in some Muslim majority countries, specifically in Bahrain and Saudi Arabia. These two countries experience negative returns during this period. Aljazira Capital (2014) also notes that there is a fall in Saudi Arabia indices in the stock market during the Ramadan period. A study by Ariss, (2001) to determine the Ramadan effect also established that stocks are less volatile during this period, and they have high returns on the last day due to economic slowdown during Ramadan.
In a study of the Pakistan stock market, Husain (1998) observed that the volatility levels are low during the Ramadan. However, the market’s average returns are not significantly different during Ramadan when compared with the rest of the year. In the analysis of the Saudi Arabia stock market for the period from 1998 to 2000, Seyyed et al. (2005) did not establish any significant changes in the stock returns during Ramadan, but they observed a decrease in stock volatility. Using data from 1992 to 2007 of 8 Middle Eastern countries, Al-Hajieh et al. (2011) established that 6 out of 8 nations had abnormal positive returns during Ramadan. Similarly, results of the research done by Carl and Azzzudin (2010) on the Malaysian stock market from 2000 to 2003 support the existence of the Eid al-Fitri effect. In a study done by Bialkoswki et al. (2012) on the stock returns of 14 Muslim countries from 1989 to 2007, it was established that stock returns are significantly higher during and less volatile during Ramadan than in the rest of the year. Recently, Aljazira Capital (2014) established that trade volumes are low and the market is less volatile in Saudi Arabia during Ramadhan since fewer people invest in the finance market.
An examination of the Ramadan and Ashoura effect by Al-Ississ (2010) on the daily returns and trading volumes of 17 Muslim countries from 1988 to 2009 established there is a significant decline in trading volume and positive returns during the five holy days of Ramadan. The researchers also noted that there is a significant drop in trade volumes, returns, and volatility during Ashoura festival. Al-Ississ (2010) also noted that there are substantial negative returns during the day of Ashoura. The investors’ engagement in religious activities and psychological and emotional wellbeing are attributed to this performance. An investigation of the Ramadan effect on the security returns of mutual funds in Turkey’s Istanbul Stock Exchange by Bialkowski et al. (2013) showed that they had high returns during Ramadan. Similarly, tests of the seasonality of the Tehran Stock Exchange by Ramezani et al. (2013) indicate that there are positive stock returns during Ramadan.
Research by Mustafa (2011) on the effects of Ramadan effect on the Pakistan financial market from 1999 to 2010 indicated that there are significant high stock returns and market risks during Ramadhan than the rest of the year. An examination of the Ramadhan effect by 15 Muslim countries from 1989 to 2012 by Al-Khazali (2014) showed that from a wealth perspective, the stock markets being investigated did not outperform during Ramadan. In the examination of the Islamic calendar anomalies on Pakistani firms from 1995 to 2011, Halari et al. (2015) concluded there was a minimal seasonal anomaly on average returns. Nonetheless, Halari et al. (2015) noted that there was a change in volatility returns, which made them conclude that investors can formulate strategies to outperform risk-adjusted basis.
The Hajj effect on the stock market causes a slowdown in market activity. Shaista Wassiuzzaman (2017) discusses the Hajj influence on the Saudi stock market by focusing on the records of the Tadawul All-Shares Index (TASI) among other indices that track the performance of stocks for a select timeframe. The period selected included the Hajj period during which Muslim believers from various parts of the world travel to the region for the pilgrimage. Notably, this period is usually characterized by volatility of stock prices throughout the region. The study was able to apply a financial statistics model that proved that the Hajj event in itself does not have an impact on the mean return values observed by the indices participating in the stock exchange. However, it clearly demonstrated that this specific religious event promoted a surge in the volatility rates observed in the region during this religious pilgrimage era for all the indices that took part in the event. Furthermore, a study commissioned in Karachi found evidence of a relationship between volatility in stock prices and monthly patterns occasioned by religion (Halari, Power & Helliar 2015). Besides, it was established that this effect was also felt in most of the other significant fuels of the Saudi economy, only except the petrochemical, retail, food and agriculture sectors. Evidently, the Hajj period leads to a decline in overall market performance.
Furthermore, the Hajj pilgrimage is a compulsory religious duty that each believer must conduct the pilgrimage at least once in their lifetime if they are financially and physically able. The event requires that one remains capable of supporting their dependents even when on the pilgrimage journey (Henderson 2011). The requirement for one to be able to be both financially and physically healthy promotes volatility as a person limits his or her spending while on the trip to ensure that the requirement is fulfilled while still taking care of one’s dependents when he or she is absent on the pilgrimage. Notably, intraday volatility is an important indicator of market performance (Alsubaie 2009, p.139). The pilgrimage, therefore, limits the economic participation of the religious tourists who visit the region as a result of the religious beliefs that are enforced by Islamic practices. Obviously, this is because the participants of the pilgrimage are expected to behave and act within the confines of their religion regardless of being away from home, and this, in turn, leads to a fluctuation of returns that the stock markets in the region. The volatility of the stock market prices is promoted by the tendency of people in the Saudi community to spend little, resulting in a high volatility of the shares when their prices drop (Abbes & Abdelhédi-Zouch 2015, 141). This effect is also considerably noted to disappear after the Hajj pilgrimage contributing to its characterization as a seasonality that is brought about by the Hajj pilgrimage that sees multitudes of believers travel to Saudi.
Investments in Islam
Mitchell, Rafi, Severe, and Kappen (2014, p. 108) assert that among Muslims, religious principles act as the main guidelines of how individuals invest and not the attractiveness of returns. Under the Islamic Sharia law, for example, money cannot be used to create more money through usury. Accordingly, money and other cash equivalents are strictly viewed as a store of value, and investors cannot earn interest on money they lend or be required to pay interest on borrowed cash (El Gamal, 2000). Additionally, Mitchell et al. (2014) note that Islamic principles mandate that financial activities should not have any form of ambiguity (ghara) or speculation and gambling (maysir). Conversely, in conventional finance ambiguity is considered as a form of risk, and investors earn a reward for engaging in the risky trade. Based on these guidelines, any form of speculative activities in finance such as futures, warrant, short-selling, and options are prohibited in Islam (Mitchell et al., 2014). In this regard, investors may not necessarily be attracted to invest in stocks during the Ramadhan since it is against Islamic faith to benefit from speculative income that is attributable to the Ramadhan effect.
El Gamal (2000) also notes that Islamic finance prohibits individuals from investing in non-productive and potentially harmful activities such as trade in alcohol, adult entertainment, casinos, and firearms. The underlying policy in Islamic finance is one based on profit and loss sharing. In this case, the suppliers of funds become investors and not creditors, and the debtor becomes just an entrepreneur. Accordingly, the entrepreneurs and investors share the business risks and returns. Mitchell et al. (2014) opine that in contemporary business settings, creditors do not share the business risk with their debtors. Instead, they are entitled to a fixed payment (interest) irrespective of their debtor’s business performance. In this regard, Muslim investors also consider the type of business that they are financing. In particular, the enterprise must be one that is acceptable according to Islamic teachings. Similarly, indices in the financial market must be those that are Sharia-compliant (El Gamal, 2000).
In many instances, the people living in a given locale practice a culture that is mainly guided by their religious beliefs. The holidays brought about by religion have an impact on various aspects of a country’s economy by presenting a seasonality effect on the stock markets – the Saudi Stock market and those in the entire UAE region being no exception (Al-Ississ 2010, p. 462). Religion in this area also influences the behavior of people and their spending habits, thus affecting the economy as it is witnessed in Saudi. For instance, the stock market in this region depicts a seasonality that fluctuates depending on the different religious events, such as Ashoura, Ramadan, and the Hajj, while the weekends also bring about a specific fluctuation trend in the prices of stocks in the Stock Market. However, the literature highlighting the impact that religion contributes to the fluctuation pattern as is portrayed in the Saudi Stock Exchange Market is limited. Even so, it is evident that religious events and seasons contribute significantly to the seasonality trends that the market experiences as religion plays a significant role in the cultural, social and economic trends in many societies (Al-Kazali et al., 2017). Notably, the Muslim religious beliefs depict money as a religious contaminant (Bley & Saad 2010). The impact of faith and religion on the Saudi Stock Markets is significant, and there exists a big gap in the inadequacy of literature relating these two aspects.
In a similar fashion, the Ramadan causes a decline in market activity. While considering the Ramadan effect, it is important to note that the Saudi calendar is grounded on the Hijri calendar which brings about a seasonality in the economy of the area during Ramadan as well as Eid-El-Adha and Eid-El-Fitr (Seyyed, Abraham & Al-Hajji, 2005). Particularly, Ramadan, being celebrated in the ninth month of this calendar, is marked by a decline in the participation of people in their businesses, leading to a go-slow in the economic activities during this Holy month. The month is culminated by a big celebration known as the Eid-El-Fitr, where most people spend greatly on the purchase of new outfits and house decorations for the celebration. This influx causes many traders to increase the prices of the commodities, especially if they tend to be in high demand during the said period. This seasonality characterized by a go-slow in business and trading activities to a great extent eventually impacts the trading trends in the financial and stock markets. This influx eventually normalizes after the celebrations of the culmination of Ramadan. The Holy month of Ramadan is seen by almost all members of the community, and this, therefore, affects the trading trends through the demand and supply forces and overall the trading and purchasing trends of the populace (Abbes & Abdelhédi 2015). In this manner, the lunar calendar that is observed by the Saudi community by virtue of being Muslims promotes seasonality in the economy of the region.
Further, according to Jadwa Investment Report (2012, p.1), the religious inclinations of the Saudi community affect the companies that have been listed in the stock exchange indices due to their influence on the forces of supply and demand during Ramadan. The impact is of these forces is often reflected on the share prices as the resultant high volatility of returns is a burden that should be shared by all stakeholders. In addition, Ramadan also happens during the hottest months of the year in the Northern hemisphere, further intensifying the slow activity of business. The hot days make it impossible for companies to continue running at their optimal productivity rates worsening the go-slow that the Saudi economy experiences during this period before it picks up before the Eid-El-Fitr celebrations (Wasiuzzaman & Al-Musehel 2017). Evidently, religion impacts negatively affect the general momentum at the Saudi Stock Market.
When considering the Sunday and weekend effects on the Saudi Stock Markets, this study analyses the generalized theory of the days of the week effect. Indeed, markets in predominantly Muslim communities face challenges as practices such as speculation and short selling are frowned upon (Hakim & Rashidian 2002, p.3). In the financial markets, this phenomenon that is mostly seen in the Muslim economies is taken to be a puzzling anomaly of seasonality. An analysis of the Tadawul All-Shares Index (TASI) records demonstrates that stock returns follow different processes for the weekdays and the weekends and particularly on Sundays. Furthermore, a dismal performance in the stock market sets out a ripple effect that affects the world oil prices (Jouini, 2013). This contributes to the seasonality trend that the mean daily returns of the stock exchange markets record daily are different with significant differences between the weekdays and the weekends particularly on Sundays (Ulussever & Kar, 2011). While the highest stock prices were highly noted on the last day before closing the trading week, it also factors in the concept of religion as most of the population is Islam meaning that they worship on a Friday.
Additionally, the Saudi stock market showed the lowest volatility on Sunday (Farooq, Bouaddi, & Ahmed, 2013 p.1727). This, therefore, implies that the trading day tends to be shorter in this economy leading to the seasonality experienced by the Saudi Stock Market. Instead, the prices were found to be highest on Sunday leading to the development of the terms the Weekend and the Sunday Effects. This seasonality is also demonstrated in the business productivity levels noted in the country introducing the aspect of the activity. Most people have their productivity at their lowest on Fridays as they tend to take breaks for worshipping, and the week tends to close at an absolute slow (Nishat & Mustafa 2002, p. 59). The market notices a reduction in the productivity levels between the weekends and the weekdays thereby showing how religion brings about the weekend and the Sunday effects. The GARCH model, when used to analyze the records of Tadawul All-Shares Index (TASI) prove considerable, estimated measures for the different days of the wee for the stock exchange returns and volatility. Evidently, the weekend and Sunday effect is present in TASI in the period that was being studied (Abdalla, 2012, 167). This demonstrates the fact that the community largely incorporates religion into their cultural and economic lives thus impacting the returns and volatility rates in the country.
The seasonality of the stock market extends beyond religious holidays as many other factors come into play, of which may form subjects for future research. For instance, stock prices may perform better at a certain time during the year as investors increase the market activity by injecting fresh capital into the market. Moreover, such activity may lead to higher volatility with large price surges. Similarly, the bourse may be inactive on other months when investors pull out due to an economic slowdown. In the same vein, the seasonality of the stock market may be influenced by major news releases such as the release of financial results by companies. To illustrate, the market may rally when good outcomes are expected and vice versa. These instances may form a basis for future research in analyzing the seasonality of the bourse.
The role of religion in the economic seasonality that is showed in the stock markets of Saudi cannot be underplayed because it is a community whose decisions, behaviors and culture are influenced by their religion. Given the religion instructs its believers on how to spend their money in specific cases, the religion tends to affect the forces of supply and demand within the economy. As a result, this also affects the productivity rates of the companies that greatly impact the economic performance of the companies that dictate the return and volatility rates of the Saudi Stock Market. The religious occasions and events have become part and parcel of the economic and social cultures of the population directly influencing the forces of supply and demand. The seasonality also follows a given trend that respects the religious celebrations of the Islam religion, and this is the basis of the argument that religion plays a role in the seasonality and the impacts on returns and volatility noted during the periods. However, the research and literature about the relationship between religion and the Saudi Stock Market are scarce, and extensive research needs to be conducted to theorize this relationship.
Investment Strategies During Ramadhan, Ashoura, and Hajj Festivals
The investment strategy that should be undertaken by any investor to a large extent depends on the performance of the financial market of each country. According to Agarwal (2015), the Saudi stock market is significantly affected by the Ramadan effect. Agarwal (2015) notes that in the Saudi’s Tadawul All-Share Index (TASI), there is always a decline in the index level and a decline in volumes just before the start of Ramadan and also in the initial two weeks of the holy month. He particularly notes that this trend is brought by the exit of retailers who participate in the stock market to liquidate holdings so that they can meet their family and personal expenses. Additionally, some investors expect the share prices will decline due to the depressed volumes; therefore, they realize their gains before the index’s decline.
Agarwal (2015) notes that the volume of shares traded in TASI starts to decline a month before Ramadan, and volumes are at their lowest, which is 60% of the annual average, during this period. From the third week, the volumes start to increase gradually, which is mainly due to investors attempt to build positions as they anticipate that the TASI levels will rise due to increased trading activities after the holidays. There is always an increase of about 38%
on the volume of stocks traded after Ramadan when compared to those traded during the holy month (Agarwal, 2015).
There is also a similar pattern of the TASI levels caused by the Ramadan effect. On average, there is a decline of 0.6% in the index between the two weeks before Ramadan and the two weeks of the holy month (Agarwal, 2015). The TASI remains relatively flat in the subsequent two weeks and only starts to rise at an average of 2.9% in the fourth week (Agarwal, 2015). Overall, Agarwal (2015) notes that the food, retail, and hotel and tourism are positively affected by Ramadan. In particular, the food and agriculture sector gain 6% during Ramadan due to more consumption of staples. The retail sector also records a positive growth of about 4% due to more discretionary spending. Finally, the hotel and tourism sector enjoys an increase of 4% due to increased domestic demand and a high number of international tourists occupying hotels.  On the contrary, Ramadan results in a decline in the banking, cement, and construction sectors. The cement sector is mainly affected by the decrease in construction activities in the country during Ramadan (Agarwal, 2015).
According to the Aljazira Capital (2014, p.3), Saudi Arabia experiences Ramadhan effect on its financial market. Particularly, the returns are high, and volatility is low during this period. In general, the trend in the financial market is caused by the majority of people spending more time in spiritual affairs and dedicating less time for business. Using 14 indices from 2000 to 2008, the Aljazira Capital (2014), established that there is a variance in sectoral performance for before, during, and after Ramadan. A few weeks before Ramadan, most people dedicate most of their time for the holy month. Consequently, more people exit the market since they plan on using the money during Ramadan, and their exit results in the fall in the indices. The most affected indices are usually those in the building and construction sector. During Ramadan, the trade volumes are usually low because only a few people are always willing to invest in the financial market. As a result, most of the sectoral indices are typically flat. After the Ramadan, there is always a rally in most indices, with the most active ones being those that are in the energy, banking, and petrochemical sectors (Aljazira Capital, 2014, p. 5).
According to Al-Ississ (2010) there are substantial negative returns during the day of Ashoura mainly due to investors’ engagement in religious activities and their psychological and emotional wellbeing. Since the Ashoura festival is associated with mourning, from a psychological perspective, investors are usually sad and less optimistic. Similarly, there are low returns and low market volatility during the Hajj festival due to low investor participation in the market. Shah et al. (2017, pp. 58) notes that Muslims dedicate most of their time to prayer and religious rituals during Hajj hence slowing their investment activities. Additionally, the Hajj presents various short term opportunities, which results in cash outflows from the financial markets. The slowdown in the financial market makes it to have low returns and volatility during the Hajj festivals.
Other essential Calendar Effects that can affect an investor’s decision making in the TASI are the Day-of-the-Week Effect and the Weekend Effect. The day-of-the-week effect implies that the returns during certain days vary and some days outperform others. The Weekend effect is the tendency of stock markets to underperform during the first day of trading, which is usually on Monday. In Saudi Arabia, the market often rises on Sunday, which is the first trading day, and stock prices are generally higher than those of Thursday, which is the last trading day (Aljazira Capital, 2014, p. 2). Given the financial market movements in Saudi Arabia, an investor should make the following strategies:

  1. An investor should sell his/her holdings in the first trading day of the week (Sunday). He/she should avoid making buying on this day.
  2. An investor can make a short-term gain if he/she invests in the market just a few weeks before Ramadan and sells the stocks in the month after Ramadan.


  1. H0: There is no significant decrease in the return of stocks in the TASI during the Ramadan, Ashoura, and Hajj festivals when compared to other period of the year.

Ha: There is significant decrease in the return of stocks in the TASI during the Ramadan, Ashoura, and Hajj festivals when compared to other period of the year.

  1. H0: There are no significant differences in volatility in the TASI index during Ramadan, Ashoura, and Hajj festivals periods when compared to other periods of the year.

Ha: There are significant differences in volatility in the TASI index during Ramadan, Ashoura, and Hajj festivals when compared to other periods of the year.

  1. H0: There is no significant change in the volumes traded in the TASI during Ramadan, Ashoura, and Hajj festivals.

Ha: There is a significant change in the volumes traded in the TASI during Ramadan, Ashoura, and Hajj festivals.
Chapter 3
Data and Methodology
This paper uses the daily data of the Tadawull All Share Index (TASI) from Saudi Arabia to establish whether Ramadhan, Hajj, and Ashoura festivals lead volatility in the country’s financial market. The data used in this analysis was from January 1998 to December 2017. I collected the data of the daily performance of TASI from, which I later compiled to establish the weekly performance. The research model has followed the Bialkowski et al. (2013) and also Chau et al. (2014) formats to test whether Ramadan, Ashoura, and Hajj festivals have an effect on the returns and conditional volatility of the TASI. It also applies the GARCH-based specification, which is essential when there is a variation in the conditional mean and variance. This econometric model follows three main steps prior to the GARCH analysis. In the first step, all the daily data is used to estimate the average weekly performance from 1998 to 2018. Secondly, the data is arranged in a column, and grouped 52 weeks for each year. This arrangement of data is important for the analysis of whether Ramadan, Hajj, and Ashoura have an effect on the return and volatility of the TASI. Thirdly, the data is then analyzed using Excel software, which has a NumXL plugin, and to enable the analysis of the GARCH model, also compared it with results from EViews.
In terms of conditional variance, we used a standard GARCH as provided by Bollerslev (1986), and also Glosten el al. (1993) asymmetric GARCH. According to Bollerslev (1986), the GARCH process is given by:
𝜎2𝑡 = 𝜔 + 𝛼𝜀2𝑡−1 + 𝛽𝜎2𝑡−1
𝜎2𝑡 = the conditional variance
𝜔= the innovation
𝛼𝜀2𝑡−1 = the ARCH term that measures the impact of past innovation on current variance
𝛽𝜎2𝑡−1= the GARCH term, which measures the effects of past variance on current variance.
The degree of persistence in the model is measured through the sum of the ARCH and GARCH parameters (α + β) (Glosten el al., 2013). Finally, all the four constraints are represented in the model so that it is stationary and stable.
ω > 0; α ≥ 0; β ≥ 0; and
α + β < 1 Glosten el al., 2013).
The TASI returns follow a martingale process, and can thus be modeled using the equation rt = μ + et. In this case, if the value of the stock market index at time t is Pt, the returns for the same period are derived using the following equation:
rt= ln(Pt/Pt-1)
μ = mean value of the return, and it is usually zero
et = random component of the model that is not auto correlated in time. It has a mean value of zero.
The sequence et, can also be considered as a stochastic process, that can be expressed in the following manner:
et = zt + δt
zt= the stochastic variable that is not auto correlated in time with the standardized normal distribution.
δt= the conditional variance of returns at time t (Glosten el al., 2013).
The summary statistics of the daily returns is in the attached excel copy. The summary statistics of the TASI is in Table 1.a. This table illustrates that the Saudi financial market is volatile, and is thus affected by the Ramadan, Hajj, and Ashoura festivals. Additionally, the results showed that the TASI has high mean return of an average of 0.001678, and the standard deviation was 0.033783%. Regarding skewness and excess kurtosis, the data revealed that the TASI has a skewness of -1.39, and an excess kurtosis of 807. The test statistic also rejected that the data is normally distributed at 5% level of significant. The data analysis also showed there was the presence of conditional heteroscedasticity in the return series, which was shown by the ARCH-effect. These results justified the need for performing a GARCH volatility test on the model.
Table 1

Summary Statistics  
  Average: 0.001678
  Standard Deviation: 0.033783
  Skew: -1.39
  Excess Kurtosis: 8.07
  Median: 0.003669
  Minimum: -0.23838
  Maximum: 0.137621
  1st Quartile: -0.01054
  3rd Quartile: 0.017715

Table 2

Significance Test   5.00%
Target P-Value SIG?  
0.000 5.95% FALSE  
0.000 0.00% TRUE  
0.000 0.00% TRUE  

Table 3

  Test P-Value SIG?
  White-Noise? 0.74% FALSE
  Normal Distributed? 0.00% FALSE
  ARCH Effect? 0.00% TRUE

The p-value in Table 3 indicates that there is no significant white-noise in the model. It also shows that there is an ARCH effect.
Figure 1 shows the pattern of returns for combined Ramadan, Hajj, and Ashoura festivals to the terminal date. The series shows there are signs of ARCH effects since the amplitude of the returns vary with time. Visually, the combined effects of Ramadan, Hajj, and Ashoura festivals are extreme.
Figure 1
Combined Effects of Ramadan, Hajj, and Ashoura on TASI
Image from Excel
Figure 2
Image from EViews
The wide swings can be taken as an indicator for underlying volatility. In the squared residual figure observed there are clusters of periods with high volatility and those with low volatility. Visually, these clusters appear to be auto correlated, which can mean that simple serial correlation exists. In this case, when volatility is high, it continues to be high for a while, and when volatility is low it continues to be low for some time.
Figure 3
Test of Coefficient Covariance (Data from EViews)
In the first part of the figure shows the mean equation and the second part shows the variance equation. The results of the analysis show that we have an ARCH effect, since there is statistical significance. In this model, the significance levels was set at 5% (0.05); therefore, the p-value should be less than 5% for there to be statistical significance.
Figure 4
A GARCH_M analysis of the data also showed that there was an ARCH effect since the data was significant. Importantly, the GARCH_M captures the risk factor.
From the standard deviation, we observe that the annual combined effects, shown by (Ramadan, Hajj, Ashoura) have the low volatility on the TASI, which indicates they have minimal impact on the overall performance of the Saudi Arabia financial market.
Figure 5
ACF for Ramadan, Hajj, Ashoura From Excel with NumXL Plugin
PACF for Ramadan, Hajj, and Ashoura
Figure 6 from EViews
The frequency observed in the ACF and PACF shows the season effects of Ramadan, Hajj, and Ashoura on the TASI. Figure 5 and 6 show that there is ARCH effect in the model. The autocorrelation function (ACF) and partial autocorrelation function (PACF) confirmed that the data was stationary. Since the ACF shows exponential decay, it is indicative of a stationary series.
Quantification and Statistical Verification of GARCH and EGARCH models
Table 4

GARCH(1,1)   EGARCH (1,1)
  Param Value  
  µ 0.00 0.00
  α0 0.00 -1.15
  α1 0.35 0.50
  β1 0.62 0.89
  γ1   -0.02

Using the parameters of the GARCH (1, 1) model, the GARCH_VL is established as 0.052252. Similarly, the parameters of the EGRCH (1, 1) model establish that the EGARCH_VL as 0.03328%. The results from the GARCH (1, 1) and EGARCH (1, 1) indicate that the GARCH components of the variance are statistically significant in the two models.
The Goodness-of-fit for the model is shown below:
Table 6

Goodness-of-fit   GRACH (1, 1)  
2138.65 -4271.29 1

According to GARCH (1, 1), the log-likelihood of the goodness-of-fit (LLF) is point 2138.65. CHECK examines the model’s stationarity and positive variance, which is established as being 1.
Table 7

Goodness-of-fit   EGARCH (1, 1)  
2134.99 -4259.99 1

In the EGARCH (1, 1) analysis, the log-likelihood of the goodness-of-fit (LLF) is point 2134.99.
Table 7

  Residuals (standardized) Analysis      
  AVG STDEV Skew Kurtosis Noise? Normal? ARCH?
  -0.03 1.00 -0.86 4.58 FALSE FALSE FALSE
Target 0.00 1.00 0.00 0.00      

The results of this analysis show that the observations of the GARCH (1, 1) did not have a significant autoregressive conditional heteroscedastic (ARCH) effects. It was also established that the observations were not normally distributed. Based on noise, it was found that the observations were auto correlated. There were excess kurtosis of 12.63.
Table 8

  Residuals (standardized) Analysis      
  AVG STDEV Skew Kurtosis Noise? Normal? ARCH?
  -0.04 1.00 -0.88 4.79 FALSE FALSE FALSE
Target 0.00 1.00 0.00 0.00      

The results of this analysis show that the observations of the EGARCH (1, 1) did not have a significant autoregressive conditional heteroscedastic (ARCH) effects. It showed that the observations were not normally distributed. Based on noise, it was established that the observations were auto correlated. There was an excess kurtosis of 4.79. From the results of the results of the analysis we establish the following:

  1. There is significant decrease in the return of stocks in the TASI during the Ramadan, Ashoura, and Hajj festivals when compared to other period of the year.
  2. There is no significant difference in volatility in the TASI index during Ramadan, Ashoura, and Hajj festivals when compared to other periods of the year.Since figures 5 and 6 show that there is ARCH effect in the model,the autocorrelation function (ACF) and partial autocorrelation function (PACF) confirm that the data is stationary. Since the volatility process is non stationary, it there for means that there is no volatility in the TASI index during Ramadan, Ashoura and Hajj festival periods compared to other periods of the year.
  3. There is significant change in the volumes traded in the TASI during Ramadan, Ashoura, and Hajj festivals.

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