Investor mood, herding and the Ramadan effect

Outline

• Abstract
• Keywords
• Jel Classification
• 1. Introduction
• 2. Literature Review
• 2.1. Herd Behavior and Mood
• 2.2. Herding and Mood During Ramadan
• 3. Methodology and Data
• 3.1. Methodology
• 3.2. Data
• 4. Results and Discussion
• 4.1. Empirical Findings
• 4.2. Discussion – Contributions
• 5. Conclusion
• Acknowledgements
• References

Conclusions

This paper examines the relationship between herding and Ramadan motivated by emotional/behavioral expressions (enhanced social interactions; optimism) which have been observed to facilitate herding and particularly during Ramadan. Drawing on a sample of seven stock markets from majority Muslim countries, we document the presence of significant herding during Ramadan in most of our sample markets. We also show that herding appears significantly stronger within Ramadan for most tests where it is significant on both Ramadan and non-Ramadan days. Overall, herding significance within/outside Ramadan exhibits some variation in its robustness across markets to variables reflective of domestic (market returns; market volume) or international (US market returns; US investors’ sentiment; global financial crisis) market states.

Our work produces original contributions on the impact of religion in financial decisions, by demonstrating that a religious occasion (Ramadan) is a determinant of herding significance. Previous research has only indirectly made inferences about the impact of Ramadan on investor behavior (by examining Ramadan as a seasonal anomaly). To the extent that social interactions and positive sentiment constitute Ramadan’s two key behavioral features, our results confirm at the aggregate market level prior evidence from micro-level research on the effect of these two features upon herding. The role of Ramadan, as a sentiment-related occasion in motivating herding suggests that Ramadan constitutes a sentiment-proxy worth considering when researching herding in majority Muslim markets. This also contributes to the wider herding debate and the impact of social norms on markets by laying the ground for further research into whether major religious occasions (e.g., Catholic or Orthodox Easter week) can affect herding behavior. From the perspective of practitioners, our study contains implications for the investment community, in particular for traders with exposure to equity markets in majority Muslim countries.