The purpose of the study is to investigate whether Ramadan effect persists in the Karachi Stock Market. Ramadan is the Holy month of fasting and it is expected that it affects the stock markets of Pakistan as well as the stock markets of the world wherever Muslim population exits in abundance. Ramadan is the different from other months because Muslims perform religious rituals thought the month, i.e., fasting, aaitakaf, etc. the purpose of this study is to investigate whether theses religious rituals have any affect on the stock market. Ramadan effect is found in Karachi Stock Market and mean daily return in the month of Ramadan is significantly less than other months of the year.
Introduction
A number of studies have been carried to analyze the relationship of anomalies present in the stock market such as; day-of-the-week, weekend, and January effects. These anomalies have strong implications in the stock market. The most important anomaly is monthly effect on stock market. The monthly (or January) effect suggests that daily returns are higher in January than in any other month (Cadsby, 1989; Lakonishok and Smidt, 1988; Cadsby and Ratner, 1992; Raj and Thurston, 1994; Mills et al., 2000; Floros, 2000). Although some researchers didn't find the month effect in different countries despite it is considered as most important anomaly. The January returns are significantly higher than any other months (Haugen and Jorion 2006). A similar study has been carried in low income African countries, i.e., Ghana, Nigeria, and Zimbabwe. The results revealed no January effect in Nigerian and Zimbabwean stock market whereas Ghanaian stock market showed positive January effect (Ayadi and Dufrene). Floros (2008) suggests that January effect doesn't exist in the Greek stock market. In addition, January effect is also not found in the Ukrainian stock market (Depenchuk, Compto, and Kunkel).
Most of researchers found significant January effect on stock market, in which January return was higher that any other month. They suggest one should invest at the starting of the January to yield higher returns for following reasons:
One of the strong causes of January effect is tax-selling-hypothesis. According to tax-selling hypothesis, most of the investors sell low priced stock before the end of year to lower their tax liability. Those same investors reactivate in January to purchase shares which tends to raise stock prices.
People sell their stocks because they go on vacation.
The seasonal anomalies in the stock market have been studied in the different stock markets of the world. Rozeff and Kinney (1976) found the January effect in the USA, and then
Guletkin and Guletkin (1983) reported significantly higher stock returns in January for most of 17 developed countries. Reinganum (1983) and Roll (1983), also found that January returns are higher than any other month.
However, another anomaly can be studied in Islamic countries is the Ramadan effect. Ramadan is the ninth month of Islamic calendar and it is regarded as the holy month. Ramadan, is the month of fasting, in which eating, drinking, and smoking is prohibited from dawn to sunset. Hotels and restaurants remain closed in day times thought the holy month of Ramadan. In addition, Muslims are encouraged to perform religious rituals in the whole month, such as, fasting, salat-ul-nafil, recitation of Holy Quran, Aatikaf, and perform social services. Apart from that, some people also visit Saudi Arabia to perform Hajj and Umrah. Muslims are refrained from sin and wrongdoings, which may restrict from investing in stock market in this month because Muslims may consider it as gambling. Hence, the purpose of this study is to investigate whether stock market shows Ramadan effect.
Literature Review
Title: Day-of-the-week and other market anomalies in the Indian stock market
Author: Mahendra Raj and Damini Kumari
Aberdeen Business School, Robert Gordon University, Aberdeen, UK
Source: International Journal of EmergingMarkets
Vol. 1 No. 3, 2006, pp. 235-246
This research has been conducted by Raj and Kumari (2006) in India. The purpose of this paper is to investigate presence of seasonal anomalies present in the Indian stock market. For the purpose of the investigation, data is collected from Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The data from BSE consists of weekly data for the period of 1979-1998 and daily for the period of 1987-1998. While the data collected from NSE comprises of daily and weekly data collected for the period of 1990-1998. The hypotheses for the research were 'mean daily return is the same for all days of the week', 'mean return on the Monday equals to mean return on the other days' and 'mean daily return in the January equals to mean daily return in the other months'. The dependent variable for the study was stock return whereas days of week are taken as independent variables. The regression analysis is used to check these hypotheses. The results revealed that there is no Monday effect while January effect is found to positive in India.
Title: The January Effect: Still There after All These Years
Author(s): Robert A. Haugen and Philippe Jorion
Source: Financial Analysts Journal, Vol. 52, No. 1 (Jan. - Feb., 1996), pp. 27-31
Published by: CFA Institute
This study was conducted in 1996 by Haugen and Jorion in New York Stock Exchange (NYSE). The purpose of the study was to investigate whether January effect still persists in the stock market or it has been vanished. All stocks listed on NYSE were taken to be as the sample for the study. The data for study purpose was collected from Centre of Research in Security Prices (CRSP) from 1926 to 1993. The hypothesis for the research was 'stock return in the January is the same as the stock return in other months of the year'. The dependent variable for the study was stock return which analyzed through the all months of the year. The time series regression analysis was used to fin the find results. The study didn't find the evidence that the January effect disappeared from the NYSE. The results showed that January returns are significantly higher than the other months of the year.
Title: The monthly and trading month effects in Greek stock market returns: 1996-2002
Author(s): Christos Floro
Department of Economics, University of Portsmouth, Portsmouth, UK
Source: Managerial Finance Vol. 34 No. 7, 2008 pp. 453-464
This study was conducted by Floro in Greek stock market. The purpose of the study was to investigate the month trading month effect in the stock market returns of the Athens Stock Exchange (ASE). The data is collected from ASE index and official page of the ASE (www.ase.gr). The hypotheses for the study were 'mean return for all the months is equal' and 'mean return on first fifteen days is equal to mean return on the last fifteen days of the month'. The study variable is stock return and moths of the year are used to investigate the retune on stock. The result not showed January effect in ASE. The daily return in the January was not higher than the daily return in the other months. In addition, study found that returns over the first fifteen days of the moth were higher that the last fifteen days of the month.
Title: The Turn-of-the-Year in Canada
Author(s): Angel Berges, John J. McConnell, Gary G. Schlarbaum
Source: The Journal of Finance, Vol. 39, No. 1 (Mar., 1984), pp. 185-192
Published by: Blackwell Publishing for the American Finance Association
This study was conducted by Berges, McConnell, and Schlarbaum in Canada. The purpose of the study was to investigate January effect on Canadian stock market from 1950 to 1980. The data was collected from Wood Gundy, Inc. of Canada which consists of month-end prices, stock splits, stock dividends, cash dividends, and number of shares outstanding at the end of each month. The data contains the data of 391 companies listed on the Toronto Stock Exchange (TSE) or the Montreal Stock Exchange from January 1950 to December 1950. The hypothesis for the study was 'mean daily return in the January is the same as mean daily rerun in other months'. t-statistics was used to arrive at the results. The result for the study was that January returns are significantly higher than the other months for small value firms.
Title: Ukrainian Financial Markets: An Examination of Calendar Anomalies
Author(s): Iryna O. Depenchuk, William S. Compto, Robert A. Kunkel
Source: Managerial Finance
The study was conducted by Depenchuk, Compto, and Kunkel in Ukraine. The purpose of the study was to investigate the market returns of the Ukrainian stock and bond markets. The researchers tried to examine calendar anomalies such as January effect, weekend effect, turn-of-the-month (TOM) effect in the Ukrainian stock and bond market. For this purpose data was collected from Ukrainian stock market and bond market. The daily index data for Ukrainian stocks and bonds is collected form (www.finance.ua). (www.cbonds.info), (www.djindexes.com) additional data is collected from these websites. The hypotheses for the study were: 'All months have the same mean daily return', 'All days of the week have the same mean daily return', and 'mean daily returns during 18 days around the turn-of-the-month are the same for each of the 18 days'. Stock return is used as the study variable. Regression analysis is used to arrive at the results. The study suggests that there is no January or a weekend effect in Ukrainian stock and bond market. On the other hand study supports that turn-of-the-month (TOM) effect is found in the Ukrainian stock market.
Title: Stock Returns Seasonality's in Low-Income African Emerging Markets
Author(s): O. Felix Ayadi, Uric B. Dufrene
Source: Managerial finance
This research was conducted by Ayadi and Dufrene in low-income African countries. The purpose of the study was to investigate whether 'turn-of-year' effect persists in low-income African countries as exhibited in stock markets of the world. The study was conducted in Ghana, Nigeria and Zimbabwe. For this purpose data was collected from Ghanaian stock market for the period of 1991-1996, Nigerian Stock Market from 1984-1995, Zimbabwean Stock Market for the period of 1987-1995. In addition to that data is also collected from International Finance Corporation (IFC) emerging markets database, bloom burg financial markets, commodities, and News Service and the Nigerian Stock Exchange. The hypothesis for the research was 'All monthly mean returns are equal'. Regression analysis was used find the turn-of-the-year effect of low-income African stock markets. The results revealed that there isn't any January effect on Nigerian and Zimbabwean stock markets but Ghanaian stock market showed that there is January effect.
Design/Methodology/Approach
The study will examine the presence of Ramadan effect the Karachi Stock Market.
Dependent Variable
Stock Return
Independent variable
Days
Model
Rt = a0 + aidit + ut
Where
Rt = Monthly return in month t
a0 = Expected Ramadan return
ait = Difference between the expected return for Ramadan and the other months of the year
dit = dummy variable for months of the year and are 0 or 1 (d2t = 1 for Shawal and 0 otherwise and so on).
Title: Day-of-the-week and other market anomalies in the Indian stock market
Author: Mahendra Raj and Damini Kumari
Aberdeen Business School, Robert Gordon University, Aberdeen, UK
Source: International Journal of EmergingMarkets
Vol. 1 No. 3, 2006, pp. 235-246
Hypothesis
H1: Mean daily return in the month of Ramadan is higher than any other months of the Islamic calendar.
Technique
Regression Analysis
Sample
Daily data would be collected on stock prices of KSE-100 index for the period of 1991-2009.
Sources of Data
Karachi Stock Exchange (KSE)
www.kse.com.pk
Stat Bank of Pakistan
