Is There Any Diwali Effect?

Abstract

The question - 'Does the stock market overreact?' (De Bondt and Thaler, 1985) gave start to a new wave of thinking known as behavioural finance . Weak form inefficiency of the stock market was discovered by them after analyzing how people are systematically overreacting to unexpected and dramatic news events, which was surprising and profound. The Efficient Market Hypothesis, as proposed by Fama (1970) asserts that the stock prices fully reflect the relevant information. The asset prices follow a random walk path' i.e. they are merely random numbers. The study conducted by Caginalp, G. and H. Laurent ( 1998) by the predictive power of price patterns finds patterns and confirms that they are statistically significant, even in out-of-sample testing and report. The pattern of the stock index might help in predicting some of the effects of the various events. The calendar anomalies tend to exist, which goes against the efficient market hypothesis. The researchers have used the Gregorian calendar to investigate the calendar anomalies. There are various countries and societies, which follow their own calendar on the basis of their religion. For example, the Hebrew calendar is followed by the Jewish society, which is strictly based on !uni-solar calendar; the Christian society follows the Gregorian calendar, which is based on the solar calendar, similarly the Hindu and Chinese follow their own calendars. The Hindu Calender2 is called "Panchanga " and it is based on both movements of the sun and the moon. The festival called "Diwali " (Festival of Lights) is typicallycelebrated during the end of October and the beginning ofNovember. The special Ritual called "Mahurat Trading" can be observed on major stock exchanges like NSE, BSE, NCDEX to name a few, which lasts for about an hour. It is performed as a symbolic ritual since many years. It marks a link with the rich past and brokers look forward to it on a positive note. The investors place token orders and buy stocks for their children, which are sometimes never sold and intra day profits are booked, however small they may be. Thus, it is widely believed that trading on this day will bring wealth and prosperity throughout the year. 3 It has become quite interesting to note the behaviour of trading activities during the period preceding and succeeding Mahurat Trading. The purpose of this study is to examine the effect of the festival prior and post Diwali on the trading activities and on the returns.