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Seasonality Effect and Market Efficiency Anomalies in the Saudi Stock Market

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Saudi Stock Market 1
SEASONALITY EFFECT AND MARKET EFFICIENCY ANOMALIES IN THE
SAUDI STOCK MARKET
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Saudi Stock Market 2
Seasonality Effect and Market Efficiency Anomalies in the Saudi Stock Market
Chapter 1: Introduction
Both financial and non-financial activities have a significant effect on the performance of
the stock market. In any calendar year, there are always religious-related anomalies and non-
religious related anomalies in the financial market. Non-religious related anomalies include the
January effect and the weekend effect, while the religious ones include the Good Friday effects,
Christmas effect, Ramadan effect, and the less popular Ashoura effect (Bialkowski, Etebari, &
Wisneiwski, 2012). One unique feature of the Ramadan effect is that besides affecting the
moving calendar due to abnormal returns, it has a significant impact on investors, which
ultimately result in significant effects in the market. There are effects on investors’, who are also
believers’ health due to the prolonged fasting period, as well as in their social empathy and
feelings due to the religious activities. Additionally, most worshippers become inclined to do
good deeds, including not defaulting on their payments (Bialkowski et al., 2012). Unlike
Ramadan, which is associated with good feelings, due to the anticipation of blessings, Ashoura is
associated with negative valence due to worshippers’ anger and sadness. This paper explores
whether Ramadan, Ashoura, and Hajj festivals have any impact on the stock market returns and
trading volumes of the Saudi stock market.
According to Bialkowski et al. (2012), investors’ mood and emotion affect their
judgments in decision making, preference for risks and returns, and their responses to
uncertainties in the market. In conformity, Loewenstein et al.’s (2001) theory, ‘risk-as-feeling,’
espouses that uncertainties and risks influence individuals’ decision-making process. The risk-a-
feeling theory, suggests that cognitive evaluations and emotional reactions influence a person’s
reasoning. However, when there is a divergence between the two, emotional reactions usually
supersede behavior and influence a person’s decisions. Based on this theory, Al-Khazli et al.
(2017) opine that people with good moods are usually more optimistic than those who are
moody. In this regard, market prices and returns on investments can be influenced by investors’
emotional state, which can lead to market anomalies.
Another theory that supports the idea that religious activities can have an impact on
market performance is that of behavioral finance. Al-Kazali el al. (2017), note that investor’s
financial decisions are not always rational, and are influenced by among other things how they
feel. In agreement, Nofsinger (2005) says that social mood influences investors’ decisions, and
also business activities. Since the movements of stock markets are influenced by actual business
performance and investors behaviors, which are affected by their attitudes and perceptions, then
they can be viewed as a direct index of social moods (Al-Kazali, Bouri, & Zoubi, 2017).
Therefore, the different social environment, behaviors, and activities, such as religion and sports
have an effect on investors decisions (Hilary & Hui, 2009).
Al-Kazali, Bouri, and Zoubi (2017) note that religion has for a long time affected and
influenced the economic performance of a region. For example, the development of the modern
capitalistic economic model is associated with the development of Protestant ethic (Weber,
1905). Religion has also been found to affect social interactions, individuals and corporations’
social norms on investments (Sonjaya & Wahyudi, 2016). Likewise, Al-Kazali et al. (2017)
assert that religious beliefs influence how investors select their portfolios in Saudi Arabia.
Although various research studies have examined the effects of religious beliefs on stock
market performance, few have focused on Saudi Arabia alone (Bialkowski et al., 2012; Hilary &
Hui, 2009). Furthermore, there has been a contradiction in the result findings, specifically on the
effects of Ramadan on the performance of stock market. Among some researchers, Ramadan

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Saudi Stock Market SEASONALITY EFFECT AND MARKET EFFICIENCY ANOMALIES IN THE SAUDI STOCK MARKET Student’s Name Course Professor’s Name University City (State) Date 1 Saudi Stock Market 2 Seasonality Effect and Market Efficiency Anomalies in the Saudi Stock Market Chapter 1: Introduction Both financial and non-financial activities have a significant effect on the performance of the stock market. In any calendar year, there are always religious-related anomalies and nonreligious related anomalies in the financial market. Non-religious related anomalies include the January effect and the weekend effect, while the religious ones include the Good Friday effects, Christmas effect, Ramadan effect, and the less popular Ashoura effect (Bialkowski, Etebari, & Wisneiwski, 2012). One unique feature of the Ramadan effect is that besides affecting the moving calendar due to abnormal returns, it has a significant impact on investors, which ultimately result in significant effects in the market. There are effects on investors’, who are also believers’ health due to the prolonged fasting period, as well as in their social empathy and feelings due to the religious activities. Additionally, most worshippers become inclined to do good deeds, including not defaulting on their payments (Bialkowski et al., 2012). Unlike Ramadan, which is associated with good feelings, due to the anticipation of blessings, Ashoura is associated with negative valence due to worshippers’ anger and sa ...
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