Mohamed Robin Rashed Elalami – Seasonality in Profit Returns and Volatility, the Ramadan Effect

Calendar anomalies in profit returns are well documented. Less obvious is the existence of seasonality in profit volatility associated with moving calendar events such as the Muslim holy month of Ramadan. Using a marketing strategy specification and data for the Saudi Arabian business market – now the largest market in the Muslim world – this strategy documents a systematic pattern of decline in volatility during Ramadan, implying a predictable variation in the market price of risk. An examination of trading data shows that this anomaly appears to be consistent with a decline in trading activity during Ramadan. Evidence of systematic decline in volatility during Ramadan has significant implications for pricing of securities especially option-like products and asset allocation decisions by investors in the Islamic countries.

And over the past three decades, many empirical studies have provided evidence about the presence of calendar anomalies in market returns. Seasonal patterns in the form of the January effect and the day of the week effect are well documented anomalies. The January effect states that profit returns are higher in January than any other month of the year, especially of smaller firms. A variety of explanations have been offered to account for the excess returns during the month of January. Some of the more frequently cited reasons for the January effect include the tax-loss selling hypothesis, window dressing by institutional investors and undefined small-firm risk factors. The January effect is found in several countries around the world. The day of the week effect studies on the middle east markets report that the average return is significantly less than on other days of the week. Day of the week effect is also reported for other international equity markets.

Unlike the fixed calendar events (January effect and the day of the week effect), which have been extensively examined, the effect of moving calendar events (such as Ramadan) on risk and return have not received much attention. Major moving calendar events such as Ramadan can potentially have significant effects on economic and financial variables. The economic activities in general tend to slow down with reduced working hours in virtually all sectors. Despite the fast, however, grocery sales go up during the month thanks to the evening “iftar” feasts. Similarly, electricity consumption is reported to rise because of increase in late night socio-religious activities and shopping.


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