The Effect of Religiosity on Stock Market Speculation

ABSTRACT

This study investigates whether religiosity affects stock market speculation. We use data from the Gulf Cooperation Council (GCC) countries characterized by a high level of religiosity and clearly defined religious rules on investing. We find that during Ramadan, the stock markets of these countries encounter relatively lower levels of market volatility, idiosyncratic volatility, and trading frequency. We do not find significant changes in absolute returns during Ramadan compared with other months. However, a drop in volatility leads to higher risk-adjusted returns. Our results indicate that religiosity is negatively related to stock market speculation.

KEY WORDS:

• Ramadan
• religiosity
• seasonality
• speculation

Notes

1. The GCC religious societies offer relatively unambiguous religious guidance for stock market trading. According to a Gallup 2009 survey, the societies of the GCC countries in our data have a strong belief that religion is important in daily life. In Bahrain, 94% of the people believe that religion is important in life, 91% in Kuwait, 95% in Qatar, 93% in Saudi Arabia, and 91% in the UAE. In other countries that have been used to examine the influence of religious background on financial decisions, the percentage of people who believe that religion is important in life is much lower (e.g., France 30%, Germany 40%, United States 65%). The religiosity index is not available for Oman. For additional details, see: http://www.gallup.com.

2. We start our analysis from January 2006 due to the limited availability of GCC data prior to 2006 in the Thomson Datastream for the variables included in our study.

3. Following Ang et al. (2006), volatility can be defined as the standard deviation of at least 17 daily returns.

4. The contamination effect may appear before Ramadan because Muslim religiosity is expected to increase while preparing for Ramadan, and during Shawwaal (the month after Ramadan) when Muslims are encouraged to fast six days of Shawwaal.

5. We note that the turnover ratio captures trading frequency but fails to account for liquidity costs (Froot, Oconnell, and Seasholes 2001; Lesmond 2005; Summers 2000).

6. The $LIL$ is as in Karolyi, Lee, and Van Dijk (2012), for which they adjust Amihud’s (2002) illiquidity measurement by adding a constant and calculating the log of the daily illiquidity ratio, to reduce the influence of outliers.

7. It is important to note that our results are not caused by the change of trading hours during Ramadan, as only two out of six markets included in our study reduced trading hours during Ramadan, namely Kuwait and Bahrain. However, in results not reported here, we tested the impact of reduced trading hours in Kuwait and Bahrain on the natural logarithm of trading volume using a generalized least-squares (GLS) estimation method (e.g., Datar, Naik, and Radcliffe 1998) and including an interactive dummy variable to capture the change of trading volume of Ramadan. The results indicate that there is no significant change in volume during the Ramadan month. These results are available on request.

8. See, “Saudi Arabia Stock Report”, January 2015 (http://www.tadawul.com.sa).

9. Previous studies have applied the Sharpe Ratio as a risk-adjusted method to measure the performance of indexes (Hassan and Girard 2010; Ho et al. 2014).

10. As with previous studies, we use a proxy for the risk-free rate (Al-Khazali, Lean, and Samet 2014; Hassan and Girard 2010; Ho et al. 2014). Specifically, we use the monthly discount rates of the local central banks.

11. For the CAPM market risk premium, we use the returns of the FTSE All World Index as a proxy for the market return.