Is There A Ramadan Effect?

We're now well into the Muslim holy month of Ramadan. In this post I'll take a look at how the GCC markets tend to behave prior to, during and after Ramadan.

In my six years living in Dubai the two comments I hear most with regards to Ramadan and the stock market are:

1. Nothing much happens during the Ramadan and equity prices don't move much
2. After Ramadan the market tends to be bullish with stock prices increasing

It's not difficult to see the perceived logic in these comments. Many people tend to take holidays during Ramadan so there are less traders and investors active in the market resulting in subdued price action. However, when everyone returns after Ramadan there is renewed activity in the market which tends to result in increasing stock prices.

I want to test these ideas to see if and to what extent they're accurate. To do this I've looked at the Dubai, Saudi and Kuwaiti equity markets. Specifically, I've analysed the direction of prices (did they go up or down) and the volatility or prices (how much did they move) for each market index during Ramadan, 20 trading days prior to Ramadan and 20 trading days after Ramadan.

Firstly, let's take a look at the percentage change in the DFM General Index during, prior to and after Ramadan.

As you can see, price movements during Ramadan (approx. 20 trading days in duration) have tended to be positive with the DFM General Index increasing in value in 5 out of the last 6 years. The 20 trading days following Ramadan have also been positive but less so than during Ramadan and with only 3 of the last 6 years producing price increases. The average price change in the 20 trading day prior to Ramadan has been slightly negative.

Let's take a look at the same data for the Saudi and Kuwait indexes:

For both Saudi and Kuwait the average price change during Ramadan has been positive whereas the price change in the 20 days after Ramadan has been negative, significantly negative in the case of Kuwait with only one post Ramadan period producing an increase.

On average, the 20 trading days prior to Ramadan have both been positive, outperforming Ramadan price increases for Kuwait and underperforming for Kuwait.

Given the above results I think we can say the following with regards price direction during and around Ramadan:

1. Index prices have tended to rise during Ramadan
2. Index prices during Ramadan have tended to perform better than the 20 days following Ramadan

I think this debunks a lot of what I'm used to hearing people say about Ramadan and stock prices. If anything, based on the above analysis, Ramadan is often a reasonable month for stock prices whereas the period following Ramadan is often not.

Next, let's look at the volatility of price changes during, prior and after Ramadan. To do this I calculated the percentage range of index price movements during the three periods. For example, if an index was trading at 100 at the beginning of Ramadan and achieved a high of 125 and a low of 75 during Ramadan, the percentage range would be 50% ( [High-Low] / Starting Value = [125-75] / 100)

The percentage range is just a way of determining the volatility of price changes. High percentage values tell us that prices moved significantly whilst low percentage ranges tell us that prices were quiet, moving in narrow ranges.

Again, let's start by looking at the results for the DFM General Index:

As you can see, I've formatted the table so that high percentage ranges are in dark green and lower values are in light green. What do the results tell us? Well, the average price range prior and during Ramadan were very similar, 12.35% versus 12.89%. However, the range following Ramadan was significantly greater indicating an increase in volatility during this period.

The same results apply to the Saudi and Kuwaiti Indexes as well:

The range of prices during the 20 trading days after Ramadan are higher than the price changes during and prior to Ramadan. For Saudi and Kuwait the average price range was also higher during Ramadan than in the period prior to Ramadan.


Putting It All Together

Continuing the list of observations above we can now note the following:

1. Index prices have tended to rise during Ramadan
2. Index prices during Ramadan have tended to perform better than the 20 days following Ramadan
3. Index prices tend to increase in volatility during the 20 days following Ramadan

Based on this analysis price movements during Ramadan are not particularly muted in terms of either direction or volatility. The 20 days after Ramadan tend to produce more volatility but not necessarily on the upside as is often thought.

Following Ramadan I'll update the above tables to see if this year's index price movements are in-line with the above results. An important thing to note when interpreting the above results, however, is that we're dealing with only a few data points. The market data that I have available only goes back to 2004 so we're only looking a six data points for each index (2004 to 2009). This isn't enough to assign much confidence in the results. Certainly not enough to based trades upon.

That said, I think we can say that the typical views about Ramadan and stock price movements are not borne out by the analysis above.

Enjoy.