Ramadan Holiday Trading Strategy (Anomaly Backtest Findings)

Holiday effects (or as they are also known calendar effects) are very well-known anomalies in trading. Around these dates, like the 4th of July or Thanksgiving, for example, the market tends to perform better over a short period of time. This can be for several reasons, such as low liquidity or lack of macro news.

Ramadan is one of the most celebrated religious holidays in the world. It is a Muslim holiday that can last an entire month. So a question arises: Do stocks perform better during Ramadan? We present a Ramadan trading strategy in this article.

In this article, we will be looking at what Ramadan is, backtesting a trading strategy on the S&P 500, and comparing it to other ETFs of Muslim countries.

What is the Ramadan holiday?

Ramadan is a Muslim holiday in the ninth month of the Muslim calendar where they celebrate the revelation of the Quran to Prophet Muhammad. It involves fasting including water from dawn upon sunset, praying, and gathering with family members and friends for celebration at night.

Although both Sunni and Shia celebrate Ramadan, there are differences such as when it starts and ends. Sunni Muslims follow the lunar calendar to determine the beginning and end of Ramadan, whereas Shia Muslims follow the sighting of the moon in their local area. For this article, we will follow the lunar calendar like the Sunnis.

Countries such as Saudi Arabia, Turkey, and Egypt are among many that celebrate this holiday. It is estimated that around 1.9 billion people celebrate this holiday worldwide. 

Ramadan trading strategy – trading rules 

The strategy is pretty simple: we buy and hold the S&P 500 when Ramadan starts, and we sell it when it ends.

Remember that Ramadan is in the ninth month of the Muslim calendar, so the dates change every year in the Gregorian calendar. For example, in 2022, Ramadan started on the 1st of April and finished on the 1st of May, while in 2023, it started on the 22nd of March and will end the 21st of April.

If Ramadan started or ended on the weekend, we buy or sell the S&P 500 the following trading day. This means that if Ramadan started on Sunday, we would buy the S&P 500 on Monday.  

Ramadan trading strategy backtest – does it work?

For the backtest, we use the SPY ETF since its inception in 1993. The data is adjusted for dividends and splits. Here is the equity curve:

Ramadan trading strategy

The returns look decent, but not spectacular. Here are the trading statistics and performance metrics:

Looking at the graph above, it is impossible not to notice that the returns from 2008 till today have been very poor. Until 2008 the strategy seemed to have performed well but has disappointed ever since.

Ramadan trading strategy – comparison to Muslim countries ETFs

Is there any chance that this strategy performs better in Muslim countries? As mentioned earlier, Saudi Arabia, Turkey, and Egypt are among the biggest countries celebrating this holiday.

We decided to put this theory to the test and backtest the same strategies using ETFs from these countries. The ETFs we are going to use are KSA, EGPT, and TUR. They are adjusted for dividends and splits as well. Here are the results:

Ramadan trading strategy backtest

We won’t get into the specifics of each ETF performance metrics and statistics, but as you can see, the strategy does not perform well either. The Ramadan holiday effect doesn’t seem to work on Muslim countries’ ETFs either lately.

Ramadan trading strategy – conclusion

In sum, although the Ramadan effect performed well in the past, since 2008 it has done pretty much nothing. This is also true in Muslim countries’ ETFs.

Overall, we found out there isn’t much of a Ramadan effect or anomaly in stocks lately, and it would be better to focus or trade on other holiday dates.

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FAQ:

What is the Ramadan holiday, and how is it celebrated?

Ramadan is a significant Muslim holiday celebrated in the ninth month of the Muslim calendar. It involves fasting from dawn to sunset, prayer, and gatherings with family and friends for nightly celebrations. Sunni and Shia Muslims may differ in determining the start and end of Ramadan.

Is there a known Ramadan trading strategy, and how does it work?

Yes, there is a Ramadan trading strategy discussed in the article. The strategy involves buying and holding the S&P 500 when Ramadan starts and selling when it ends. The dates change yearly, following the lunar calendar. The strategy is simple, aiming to capitalize on potential market anomalies during Ramadan.

How does the backtested Ramadan trading strategy on the S&P 500 perform?

The backtested Ramadan trading strategy using the SPY ETF shows decent but not spectacular returns. Key performance metrics include a Compound Annual Growth Rate (CAGR) of 1.16%, time spent in the market at 8.23%, risk-adjusted return of 14.04%, and a maximum drawdown of 19.3%. However, returns have been notably poor since 2008.

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