Islamic Calendar Anomalies on the Karachi Stock Exchange
Anomalies are exceptions found in trading by the investors with the help of knowledge or information provided before an event that contradicts Efficient Market Hypothesis (EMH). Various anomalies exist in the market such as day of the week effect, month of the year effect, half month effect and weekend effect. Previous studies have focused mostly on calendar anomalies of Gregorian calendar but limited literature is available about other religious calendars such as Hijri (Islamic) especially in the context of Pakistan. The study focuses on finding the answer to the existence of anomalies in the emerging market of the Karachi Stock Exchange (KSE). The research question is based on the investor’s behavior that whether calendar anomalies can affect the returns due to the Islamic months or not? To study the anomalous behavior of KSE-100 Index, monthly Hijri calendar is analyzed for a large sample of 24 years (1991-2014). The methods selected for this study are descriptive statistics, ARCH (Autoregressive Conditional Heteroscedasticity) and GARCH (Generalized Autoregressive Conditional Heteroscedasticity) models. The findings show significant effect of Islamic calendar upon the volatility. In addition, the results demonstrate that returns show positive increase with low level of volatility during Ramadan on the KSE. Similarly, the highest volatility level is observed for the month of Zil-Qad. The findings support that calendar anomalies exist at Pakistani market which refers that the market is not efficient in its weak form and contradicts random walk theory. One of the contributions of this study is the analysis of full Hijri calendar of 12 months instead of looking for just Ramadan or Muharam effect as documented in the literature (Husain, 1998; Seyyed et al., 2005 and Mustafa, 2011). In addition to capture volatility for each Islamic month, more sophisticated techniques of ARCH and GARCH models are used for Pakistani data in comparison of simple OLS regression documented in past literature (Mustafa, 2011). Based on the existence of calendar anomalies on the KSE, the results suggest that investors can design an investment strategy based on the anomalous behavior of particular month in order to beat the market and earn abnormal profit