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The Ramadan Effect: Examining the Impact of the Holy Month on Trading Behavior

The holy month of Ramadan is a time of spiritual reflection, religious devotion, and communal engagement, and beyond its cultural and religious significance, Ramadan also influences financial market activity across the UAE and the broader GCC. Market trends during this time exhibit recurring patterns, characterized by shifts in trading behavior, liquidity levels, and investor sentiment.


Market Behavior During Ramadan

Multiple studies and historical market data have identified three key trends in financial markets across the GCC during Ramadan.

Lower Trading Volumes

Investor participation declines as market activity slows due to shifts in priorities during the holy month. With reduced liquidity, fewer transactions take place, leading to a temporary decrease in daily trading volumes. However, this slowdown does not necessarily equate to a complete market standstill. In the UAE, where trading activity remains resilient, price fluctuations and investor engagement continue.

Higher Market Returns (The Ramadan Effect)

Despite reduced liquidity, markets in the UAE and other GCC economies often record an uptick in returns during Ramadan. Investor optimism increases, and many market participants prefer to hold onto their positions rather than engage in short-term speculation. The tendency toward long-term positioning and stability contributes to the bullish trend observed in several studies.

Studies show that stock market returns are nearly nine times higher during Ramadan than in any other month of the year in predominantly Muslim countries. The UAE is no exception, having exhibited positive returns in eight of the last ten Ramadan months since 2014, with an average market increase of 2.8% over the month.

This seasonal trend is often attributed to increased investor confidence, a shift toward long-term holdings, and a decline in speculative activity. The psychological effect of Ramadan, coupled with a focus on stability and faith-driven investment behavior, further reinforces this pattern.


Investor Psychology and Decision-Making During Ramadan

Beyond technical market patterns, behavioural finance plays a critical role in shaping Ramadan’s impact on stock markets.

Increased Optimism and Market Confidence

Ramadan fosters a sense of stability and optimism, which extends to investor sentiment. The increase in serotonin and dopamine levels due to fasting may enhance positive decision-making, reduce impulsivity, and reinforce confidence in holding long-term positions. Many traders perceive the holy month as a period of economic steadiness, contributing to the seasonal rise in stock valuations.

Lower Risk Appetite and Cautious Trading

While optimism may rise, risk tolerance declines. Investors generally shift toward lower-risk holdings, favoring stability over speculative trading. This conservative approach helps explain why markets experience lower volatility in many GCC countries during Ramadan.

Cognitive Adjustments and Slower Trading Behavior

Fasting can impact cognitive functions, affecting decision-making speed and risk assessment. However, studies suggest that once the body adapts to fasting, serotonin levels increase, improving focus and reducing stress levels. This leads to less frequent trading activity, as market participants take a more passive approach and avoid high-frequency or speculative trades.


Opportunities and Risks for Investors

Opportunities

  • Market Stability: The trend of lower volatility and increased optimism during Ramadan can create favourable conditions for long-term investors.
  • Higher Returns: The historical pattern of positive stock performance offers potential upside for investors who anticipate and position themselves accordingly.
  • Psychological Market Boost: The link between fasting, serotonin increase, and investor confidence may lead to longer periods of bullish sentiment.

Risks

  • Liquidity Constraints: Lower transaction volumes can make it challenging to enter or exit positions efficiently.
  • Post-Ramadan Market Adjustments: As normal trading activity resumes, markets may undergo corrections, requiring investors to reassess short-term strategies.

For investors operating within the UAE’s financial markets, recognizing these seasonal shifts allows for more informed decision-making. As market participants continue to adapt to these cyclical trends, the broader implications of Ramadan on financial markets remain a subject of interest.

 

Written by Souzan Beydoun