Ramadan fasting is one of the most celebrated religious rituals in the world. Ramadan is a positively perceived feast (in the same way as other feasts like Christmas, New Year, etc.); therefore, we can anticipate it should positively affect investor psychology.

Academic research confirms this speculation. Equity returns during Ramadan are almost nine times higher and less volatile than during the rest of the year. A simple market timing strategy could be therefore created by holding an equally weighted basket of ETFs, from countries with a large Muslim population during the month of Ramadan and staying in cash during the rest of the year. Due to its simplicity, this strategy could be easily incorporated into various portfolios.

Fundamental reason

Academic research postulates that the euphoria derived from Ramadan could influence investor behavior in Islamic markets. The upbeat mood during Ramadan leads to positive investor sentiment and has a positive valuation effect on equity markets in Islamic countries.

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Markets Traded

Financial instruments
ETFs, funds

Confidence in anomaly's validity

Backtest period from source paper

Notes to Confidence in Anomaly's Validity

Indicative Performance

Period of Rebalancing

Notes to Indicative Performance

estimated per annum return for strategy, calculated as equity return during Ramadan month ( ~2.7% = (1 + 38.09%)^(1/12) – 1 ) plus cash return (4%) during rest of the year

Notes to Period of Rebalancing

Estimated Volatility

Number of Traded Instruments

Notes to Estimated Volatility

not stated

Notes to Number of Traded Instruments

Maximum Drawdown

Complexity Evaluation
Simple strategy

Notes to Maximum drawdown

not stated

Notes to Complexity Evaluation

Sharpe Ratio

Simple trading strategy

The investment universe consists of countries for which stock market index data are available and in which the proportion of the population professing Muslim faith exceeded 50%. Most of the countries could be easily tracked via index ETFs. The research paper we use as an example uses 14 Muslim countries.

Ramadan is the ninth month in the Islamic calendar, which is based on the motion of the moon. The Ramadan month could be calculated by using the information on the lunar phases and sunset times from the astronomical calendar or information about Ramadan dates from various public sources.

The trading strategy is simple. The investor holds an equally weighted portfolio of ETFs during the Ramadan month. He/she is otherwise invested in cash.

Hedge for stocks during bear markets

Partially - The selected strategy is a class of “Market Timing” strategies that try to rotate out of equities during the time of stress. Therefore the proposed strategy isn’t mainly used as an add-on to the portfolio to hedge equity risk directly, but it is more an overlay that can be used to manage the percentual representation of equities (or “equity-like assets”) in a portfolio. “Equity Market Timing” strategy can decrease the overall risk of equities in a portfolio, and it can improve the risk-adjusted returns. Moreover, as strategy’s goal is to hold equity market only in a positive times for equity market factor and be out of equities otherwise, therefore this logic can be maybe used to create amended market timing strategy (using original rules) which is out of equities during positive times and holds bonds (or goes short equities) during bad times. This new amended strategy can be maybe used as a hedge/diversification to equity market risk factor during bear markets. However, performance/risk characteristics and overall correlation and quality of suggested amended strategy can be find out only by rigorous backtest and source academic research paper doesn’t give us any clues on how it will perform…

Source paper
Bialkowski, Etebari, Wisniewski: Piety and Profits: Stock Market Anomaly during the Muslim Holy Month
- Abstract

Observed by more than 1.5 billion Muslims, Ramadan is one of the most celebrated religious rituals in the world. We investigate stock returns during Ramadan for 14 predominantly Muslim countries over the years 1989-2007. The results show that stock returns during Ramadan are almost nine times higher and less volatile than during the rest of the year. No discernible difference in trading volume is recorded. We find these results consistent with a notion that Ramadan positively affects investor psychology, as it promotes feelings of solidarity and social identity among Muslims world-wide, leading to optimistic beliefs that extend to investment decisions.

Strategy's implementation in QuantConnect's framework (chart+statistics+code)
Other papers
Almudhaf: The Islamic Calendar Effects: Evidence from Twelve Stock Markets
- Abstract

This paper investigates the Islamic calendar seasonal anomalies in the stock returns of twelve countries where the majority of the population are Muslims. We show empirical evidence of statistically significant Islamic calendar seasonal effects in all twelve countries of our sample. We document evidence of positive and statistically significance returns in the month of Ramadan in Jordan, Kuwait, Pakistan and Turkey. Our results provide some evidence against market efficiency.

- Abstract

In spite of the important role religion plays in peoples’ lives, its impact on financial markets is seldom researched. This study examines the effect of religious experience during the Muslim holy days of Ramadan and Ashoura on the daily returns and trading volumes of 17 Muslim financial markets. Muslim holy days are especially conducive to isolating the elusive effect of faith and decoupling it from potential contaminants. The study documents statistically significant drops in the trading volume and changes in daily stock returns associated with religious experiences on these holy days. The effect on returns is not unidirectional as Ramadan yields a positive impact on daily returns while Ashoura is associated with a negative effect. Ramadan’s more sacred days are associated with a higher magnitude effect culminating on its holiest day,Ramadan 27th. The study utilizes the heterogeneity of worship intensity within the month of Ramadan to validate that the documented effect is indeed a result of religious experience rather than non-faith aspects of the holy days.

Ramezani, Poughajan, Mardan: Studying Impact of Ramadan on Stock Exchange Index: Case of Iran
- Abstract

One of the human characteristic and features is its beliefs. Feature which has important effect on lifestyle, culture, society and decisions making – even economic decisions. Iranian as people that most of them are Muslim has Islamic beliefs. Ramadan is peak of religious beliefs in Islam development in comparison to other beliefs like economic beliefs and soon. In this research, impact of Ramadan as worship and devotion month is exami ned on stock exchange index. Results of this research showed that there is positive and significant relationship between changes of stock exchange index and Ramadan, Shawwal and Rabi Al – Awwal months. However there is negative and significant relationship between stock exchange index and Jumada II, Rabi, Muharram and Rajab months. We examine this relationship for other month and results indicate that there isn’t significant relationship for Jumada al – Awwal, Saffar, Shaban, Dhu al – Hijja and Dhu al Qaeda.

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