* Dr. Saima Batool, Assistant Professor, Department of Management Sciences,

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1 Impact of Religious Events on Pakistan Stock Exchange: Comparison of Islamic and Non-Islamic events Saima Batool *, Zar Murad Khan, and Maqsood Haider Abstract This study aims to find out the Pakistan Stock Exchange (PSX) volatility during Religious events, like Eidul At-Fitr, Christmas, Diwali and Vaisakhi and also to compare the effect of both Islamic and non- Islamic events on daily returns of PSX. Non-financial companies of KSE-100 index, the most reliable index is taken an sample. Data, Pakistan Stock Exchange s daily return has been taken from PSX website and The Business Recorder over a period of five years from 2011 to Average Abnormal Return AABR and Cumulative Average Abnormal Return CAABR have been computed for a time window of 41 days, i.e. 20 days before, the event day and 20 days after the event. 120 days, before the time window, are taken as benchmark. Market Model (MM) is used to analyze the data, while t-test is applied to know the significance. The result shows both negative and positive significance for both Average Abnormal Return (AABR) and Cumulative Average Abnormal Return (CAABR) during the proposed window. The results reveal inefficient behavior of Pakistan Stock Exchange around Religious events. Keywords: Market return, Pakistan Stock Exchange, Stock volatility, Eidul al-fitr, Eid-ul-Fitr, Diwali, Christmas, Baisakhi, Average Abnormal Return, Cumulative Average Abnormal Return. Introduction Stock Market has a great role in the economy of a country. It provides a platform for investors to invest their hoarding safely and for the companies to access to more capital. In stock market stock is traded by dividing into pieces, called shares. The holder of the shares is called shareholder which is the owner of the company to the extent of their holdings. Rational investors always try to invest on stocks having no or less volatility. Study of the behavior of stocks prices have been traced back to 1900 by Bachelier, in his P.hd dissertation in Mathematics. In * Dr. Saima Batool, Assistant Professor, Department of Management Sciences, Qurtuba University of Science and IT Peshawar. dr.saimabatool90@yahoo.com Zar Murad Khan, M.Phil. Scholar, Department of Management Sciences, Qurtuba University of Science and IT Peshawar. zarmurad.khan1@gamil.com Dr. Maqsood Haider, Assistant Professor, Department of Management Sciences, FATA University, FR, Kohat. dr.haider@fu.edu.pk

2 which he recognized that stock market prices fully reflect the past, present and even future events (Elroy Dimson and Massoud Mussavian, 1998). Later on in studies of Working (1934) and Cowles and Jones (1937) on US Stock Market showed that US stock market share these characteristics. In mid 1960 Cooter and Fama published papers by favoring Random Walk Theory that prices move randomly and cannot be predicted. In 1965 Samuelson proved that Properly Anticipated prices Fluctuate Randomly. If one in the market is sure that the price will rise it would have already risen. Building on Samuelson approach Fama (1970) prepared a theory and evidence of Market Efficiency. He divided this theory in to three types of Market efficiency Weak form of Market efficiency, it reflect the past information into stock prices, Semi-Strong for market efficiency, stock prices fully reflect all publicly known information and Strong form of market efficiency assert information only known to any participant is reflected. He reviewed the Semi strong and strong form of market efficiency and concluded that the evidence in support of efficient market model is extensive but there is much more to be done. This leads toward event studies. The first event study was undertaken by Fama, Fisher, Jensen and Roll (1969), though the first to be published was by Ball and Brown (1968) (Elroy Dimson and Massoud Mussavian, 1998).Basu (1977) studied 1400 firms over the period of and witnessed the anomaly in Stock return. Then after a large number of studies conducted regarding events, like Day of the week effect, Monday effect (Young-Hyun, Oliver Lintonz,Yoon-Jae Whang, Ramadan effect,2006) (Seyyed at al.2004), Islamic Calendar Effect (Usman Majeed, Abdul Raheman, M. Khalid Sohail, Ghulam Ali Bhatti4 and Bushra Zulfiqar,Usman Majeed, 2015) and showed different findings about Efficient Market Hypothesis. According to EMH, the prices of the stock fully reflect all information and no one can beat the market. But some studies proved this theory false that information can affect the stock prices and one can gain abnormal return by predicting upon this information. Many researchers have been conducted to know the effects of event on stock market. Current study is also the chain of these studies, to know that whether there is any effect of religious events on Pakistan Stock Exchange. Journal of Managerial Sciences 392 Volume XI Number 03

3 The objectives of the research are: To investigate the volatility of Pakistan Stock Exchange during religious events. To know the semi strong form of market efficiency for stock market around religious events. To compare Islamic and non-islamic events. Literature Review A market in which prices fully reflect all available information is called efficient market (Eugene F. Fama, 1970).Efficient Market hypothesis based on Random walk theory which states that prices of stock changes randomly and no one can predict about the future prices (Working, 1960).Samuelson (1965) proved that properly anticipated prices fluctuate randomly. He says that if one sure that price would rise it would have already risen. It means competitive price must display price changes. Efficient Market Hypothesis has three forms. Weak form of market efficiency describes that stock prices fully reflect information relating past prices, semi-strong form of market efficiency states prices asserts all information that are publicly available while strong form of market efficiency asserts that prices reflect those information which are inside or known by participant (Fama 1970). Efficient Market Hypothesis besides its vast acceptance criticized by many researchers. Martin Sewell (2011) said that strictly speaking the EMH is false but in spirit it profoundly true. This criticism leaded towards the study of the events which may have effect on stock market. Semi-strong form of market efficiency is called Event studies (Fama 1991). Event studies examine the behavior of firms stock prices around corporate events (Kothari and Warner, 2007). In event studies the return of market is tested for any new information. The first event study was undertaken by Fama, Fisher, Jensen and Roll (1969), though the first to be published was by Ball and Brown (1968).Event studies have (mainly) two purposes, to test for the existence of an information effect (the impact of an event on the announcing firm s value) and to identify factors that explain changes in firm value on the event date (Alberta Di Giuli 2013). Journal of Managerial Sciences 393 Volume XI Number 03

4 In event study different events have been studied. Political events e.g. National Election (Numan, Qaisar and Asad, 2015), different calendar events e.g. Monday Effect (Young-Hyun Cho et.al (2006) Calendar effect (Shahid Ali and Muhammad Akbar 2009). Religious effect e.g. Mustafa (2004) studied Karachi Stock Market on the basis of Islamic calendar effect, Ramadan Effect (Seyyed, Ibrahim and Alhajji, (2004). Event studies have been a widely studied topic since the emergence of EMH. So many areas have been studied time to time and its impact has been shown. But in religious events studies more focus has been on Islamic events while Non-Islamic events have been ignored. Current study will add a new chapter in the literature by comparing the impact of Non- Islamic events and Islamic events. Data Collection The study used secondary data to test the proposed hypothesis. Data of stock market of KSE 100 index and share prices was collected from PSX website, Yahoo finance and Business recorder. Data relating religious events collected from the website of different newspapers. Hypotheses The following null hypotheses would show the efficiency of stock market in semi strong form: H 01 : There is statistically insignificant Average Abnormal Return (AABR) around religious events. H 02 : Cumulative Average Abnormal Return (CAABR) of Stock Market for all time windows is statistically insignificant for religious events. Population and Sampling The population of the study is comprised of all listed companies in Pakistan Stock Exchange which are 579. Whereas all non-financial companies in KSE-100 index are sample. KSE-100 index and companies share price during the religious event, Eid-ul-Fitr, Eid-ul-Azha, Diwali, Baisakhi and Christmas from 2011 to 2015, 140 days before, the event day and 20 days after the event is considered. A convenient sampling method is used to due to availability of data. Event day is considered as 0. But during the religious events especially during Islamic events there are public holidays so one day before the event is considered as 0 day. Journal of Managerial Sciences 394 Volume XI Number 03

5 Techniques/ Tools of data analysis Market Model (MM) (Akbar and Baig 2010) is used to analyze the data, while t-test is applied to know the significance. Average Abnormal Return and Cumulative Average Abnormal Returns are calculated using the following formula. n AABR t = i ABR it /n (1) tj CAABR t = t=ti AABR t ` (2) While Standard Deviations are calculated with the help of these two formulas t AABRt = N AAR t S AABR t (1) t CAABR = N CAABR S CAABR (2) To know the significance t-statistics is applied 2 S AABRt = 1 N 1 2 S CAABR = 1 N 1 N i=1 AR i,t AAR 2 t (1) CAR i CAABR 2 N i=1 (2) Data Analysis Average Abnormal Return (AABR) and Cumulative Average Abnormal Return (CAABR) using Market Model (MM) of Stock Market for Eid-ul- Fitr from 2011 to 2015, during the proposed window of 41 days i.e. 20 days before, the event day and 20 after the event shown in Fig.1.CAABR curve of Eidul Fitr 2011, denoted by dots shows that stock returns on the day -20,-16,-14, 0, +2, +3, +4, +5, +6, +7, +8, +9, +10, +11, +12, +13, +14, +15, +16, +17, +18, +19 and +20 are statistically significant. Journal of Managerial Sciences 395 Volume XI Number 03

6 In 2012 CAABR represented by dashes shows that stock return has been continuously variating throughout the proposed window. CAABR On the day -16,+9,+10,+11,+12,+13,+14,and +15 are , , , , , , and respectively and significant. CAABR curve during Eid days of 2013, denoted by combination of dash and dots, climbing at the beginning and declining sharply at the end, means positive at the start and becomes negative at the end. CAABR on the day -20,-19,-18,-17,-16,-15,+16,+17 and +18 are , , , , , , , and respectively. CAABR during 2014 represented by flat dots, although shows insignificance according to t-test but in average it is significant. Cumulative Average Abnormal Return of Stock Market for Eid-ul- Fitr 2015 shows mostly positive return. After day -12 this curve, represented by line, remains above zero. It reaches its highest value on the day +13 and +17 and then declines. Cumulative Average Abnormal Return (CAABR) Eid-ul-Azha ( ) reported in figure 1. all five years have been plotted in the chart with different styled cures. CAABR in Eid-ul-azha 2011, represented by dots shows a mixed trend. Before the event till day -10 it is being upper side of the 0 line then declines to negative in day -9 and then decreasing continuously with a moderate change. CAABR for 2012, represented by dashes, has been changing throughout the window of 41 days. Negative at the beginning, then becomes positive on day -14 and again drops to negative on -11. On day +20 it becomes again positive. CAABR cure of Journal of Managerial Sciences 396 Volume XI Number 03

7 Eid-ul-Azha 2013 denoted by combination dashes and dots show negative and varies throughout the event window with a moderate change in the beginning and then declines sharply after the event.caabr of Stock Market for Eid-ul-Azha 2014, represented by square dots remains positive during the event period and touches its highest value at day +20.After the event a big variation in the Stock Market is seen. Curve of CAABR, represented by straight line, shows less variation during the period of 41 days of Eid-ul-Azha 2015.But still negative and less than 0. Cumulative Average Abnormal Return for Diwali 2011 i.e. CAABR 2011, represented by dots, shows above the zero level and then drops to 0 on the event date. From day +1 to day +20 it remains negative. CAABR 2012 is represented by dashes shows the return are negative at the beginning from -17 to +8 and then becomes positive on the day +10 to +12. It touches the zero line only on day 13. Mostly it is negative and significant. CAABR for 2013, represented by combination of dots and dashes is also negative. It reaches it is lowest at day +1. CAABR 2014 is shown with flat points is totally positive and significant. It only touches the 0 line on day -11 and reaches its peak at +16 and then drops sharply. CAABR 2015 is represented by straight line is throughout negative with moderate variation but still shows significance during the specified window. Journal of Managerial Sciences 397 Volume XI Number 03

8 CAABR for Each year is represented by different curves. CAABR curve for Christmas 2011 is represented by Dots shows a mixed trend before the event while the return is positive and increasing continuously after the event. CAABR curve for Christmas 2012, represented by Dashes touches the 0 line in -14 and then moves downward by hitting its lowest at +14 day. It is Negative return throughout the period and significant. CAABR for Christmas 2013 is represented by combination of Dashes and Dots starts increasing at the beginning of the window and goes to its highest with a smooth increasing positively. Curve of CAABR for Christmas 2014 represented by Squire Points is above the line and positive throughout the time window. CAABR for Christmas 2015 represented by Straight Line, started down sloping from -12 and reaches its lowest and -13 and -14 then again shows upward trend but mostly negative return and significant. Journal of Managerial Sciences 398 Volume XI Number 03

9 CAABR 2011 is presented with doted curves, shows mixed trend before and after the event. It is mostly positive and significant. It touches the zero line at day 0 and day +3. It becomes negative in the beginning of the window and day CAABR 2012 is represented by dashes have mixed trend before the event in the beginning and start climbing at -7 and then continuously increasing by showing positive and significant. Curve of CAABR 2013 is presented by combination of dashes and dots is touches the zero line at -7 and then going upward, reaches its highest at +16 and then declines. CAABR 2014 is presented with flat dots shows a negative return after day -15 till +20, the end of the event window. Curve of CAABR 2015 is shown with straight line. It touches the zero line at -16 and then declining sharply at day +14 touches its lowest here and day 0. Mostly negative return and significant during the event window. Conclusion Efficient Market Hypothesis (EMH) claims that stock prices fully reflect all available information and no one can beat the market by gaining abnormal return based on prediction. But in current study semi strong form of market efficiency tested by taking five events and found that all events have impacted stock return. Both Average Abnormal Return and Cumulative Average Abnormal Return are significant according to t- statistics which falsifies EMH. Islamic and Non-Islamic events have impact on Pakistan Stock Exchange. Journal of Managerial Sciences 399 Volume XI Number 03

10 Recommendations As Pakistan Stock Exchange exhibit abnormal behavior during the Religious events so risk taking investor can earn abnormal return during these religious events, namely Eid-ul-Fitr, Eid-ul-Azha, Diwali, Christmas and Baiskahi. But on the other hand those investors who could not take risk avoid investing during these days to avoid redundant risk of loss. As Pakistan Stock Exchange exhibit abnormal behavior during the Religious events so risk taking investor can earn abnormal return during these religious events, namely Eid-ul-Fitr, Eid-ul-Azha, Diwali, Christmas and Baiskahi. But on the other hand those investors who could not take risk avoid investing during these days to avoid redundant risk of loss. Moreover policy maker of Stock Exchange of Pakistan are recommended to make and implement such laws, regulations and rules to control the abnormality of the return otherwise it will cause a huge drainage of investment by investor to avoid the losses they have to sustain. This study analyzed the behavior of Stock Market in Pakistan. It is recommended that future study should be the behavior of Worldly Stock Market in comparison with Pakistan, whether there is any such anomaly in the stock Market of any other country or not which will show way for making policies regarding market efficiency to Pakistan Stock Exchange policy makers. Current Study is based on non-financial companies of KSE-100 index, there are other three other indices, KSE-30 Index, KSE-All Shares Index and KMI 30 Index. Future studies can also employ these indices for event study and also include financial companies in KSE-100 index. Journal of Managerial Sciences 400 Volume XI Number 03

11 References Akhter, A., A. Sandhu. and S. Butt Islamic calendar effect on market risk and return evidence from Islamic countries. Journal of Busniness and Financial Affairs, 4 (2): 1-5. Akrami, Garkaz and Mehrazin (2012) The effect of Ramadan month on stocks abnormal return of the companies accepted in Tehran stock exchange.economics and Finance Review, Vol.2 (5) p Ali, Khan and Abubaker ( 2015) Impact of Islamic Events on Stock Market: Evidence from Karachi Stock Exchange of Pakistan. American Journal of Service Science and Management2015; 2(6): Ali and Akbar (2009) Calendar Effects in Pakistani Stock Market. International Review of Business Research. Papers Vol. 5 No. 1 January 2009, Pp Bachelier, L. (1900). Théorie de la spéculation. Gauthier-Villars. Econometric Society, Bialkowski, Etebari and Wisniewski (2007).Piety and Profits: Stock Market Anomaly During the Muslim Holy Month. Cootner, P. H. (1962). Stock prices: Ramdom vs. systematic changes. Industrial Management Review (pre-1986), 3(2), 24. Cowles 3rd, A., & Jones, H. E. (1937). Some a posteriori probabilities in stock market action. Econometrica, Journal of the Dimson, E., & Mussavian, M. (1998). A brief history of market efficiency. European financial management, 4(1), Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The journal of Finance, 25(2), Fama, E. F. (1991), Efficient Capital Markets: II. The Journal of Finance, 46: doi: /j tb x Fama, E. F., & Blume, M. E. (1966). Filter rules and stock-market trading. The Journal of Business, 39(1), Fama, E. F., Fisher, L., Jensen, M. C., & Roll, R. (1969). The adjustment of stock prices to new information. International economic review, 10(1), Journal of Managerial Sciences 401 Volume XI Number 03

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