College of Business Administration
Case Study Report
Seasonality of stock markets returns
Repersentewd by
Jaza el dossari (200801324)
Roba Al-gothmi(200700131)
Eman Al-shanqaiti(200801571)
Mada Al-enizi (200801576)
Table of contents
Executive summary ......................................................................................................................3
I.
Introduction ................................................................................................................................. 4
II. Literature review ............................................................................................................8
III. Seasonality and Saudi stock market ...............................................................................9
IV. Saudi electricity company ............................................................................................11
V. Conclusion …………………………………………………………………….........…13
References…………………………………………………………………………………...….14
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List of figures
Fig 1 Time-series example………………………………………………………………………...5
Fig 2. TASI Tadawul All Share Index……………………………………………………………7
Fig3. (TASI) period from 2004-2012………………………………………………………….….9
Fig.4 quarterly earnings growth from 2004-2012………………………………………….…......9
Fig 5Saudi Electricity Company (2004-2012) ………………………..........................................11
Fig6. Profits of Saudi Electricity Company........................................................................................11
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EXECUTIVE SUMMARY
The seasons are a strong effective factor in the commodities and financial markets. They
influence the probability of price movement, however working in the background often
unobserved. In this paper we will explain the seasonality in stock market returns by using an
example existing in the Saudi stock market and Saudi Electricity Companying Saudi Arabia.
The Saudi stock market known as the TADAWUL is the biggest not only in the Gulf
Community Council (GCC) countries, but also in the entire Arab World. TASI (Tadawul All
Share Index)is affected by many seasonal returns depending on many factors such as
Ramadan effect ,Eid – EL FITR and Eid- Eladha.
We will explain the quarterly earnings from 2004 for each of the 15 sectors of the market
and also will discuss the effect of seasonality on SEC in period of 2004 -2012. The main
reason of seasonality in time series data is the variation in climate. Summer has the opposite
effect on the SCE whose profits are strongly affected by use of air conditioning.
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I. Introduction
Seasonal variations in market are a well-known fact in business. Seasonality refers to regular
and repetitive change in a time series which occurs periodically over an extent of less than a
year. The main reason of seasonality in time series data is the variation in climate. For
instance, selling of woolen clothes clearly increase in winter season. Also customs band
tradition affects economic variables for examples sales of gold increase during marriage
seasons. Similarly, stock returns show systematic patterns at definite times of the day, week
or month. The most common of these are monthly patterns; definite months give better
returns as compared to others i.e. the month of the year effect. Similarly, some days of the
week give lower returns as compared to other trading days i.e. days of the week effect.
Many countries and societies follow their own calendar, which are based on religion in
addition to Gregorian calendar. In some countries of the population are Muslims, they
follows the Islamic calendar, which is based on a lunar calendar, referred to as the Hijri
calendar.
Seasonality Reasons & Examples
There are factual reasons behind seasonal retunes. Stock funds try to evolve year-end results
by pushing stock prices higher. Other reasons include attention payments in December,
because year-end debenture coupon payments flow partially into the stock market. The
holiday effect (Christmas, year-end) also plays a role. Positive Moods let investors to make
investment decisions by using the time-off. These factors influence the course of prices and
give seasonal patterns, which investors can utilize.
Examples of seasonality
1.
Rise of Gasoline consumption in summer due to increased auto travel.
2.
Rise of International airline prices in summer due to increased tourism.
3.
Increase of Electricity consumption in summer due to air conditioning.
4.
Decrease of Construction activity and jobs in winter in the Midwest.
5.
Increase of Consumer spending in November and December due to holiday shopping.
Seasonality, as any statistical way of analyzing the financial markets, is basically depending
on historical data. A seasonal pattern such as the fall rally is achieved by analyzing a vast
number of years. But every year is not the same. In some years the rally is highly
pronounced, in other years lower, and in a third year the market falls. Only after analyzing a
number of years does a seasonal pattern emerge.
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Other factors affecting price development, thus the course of individual years is different and
sometimes completely contrary to the seasonal trend. Some of these factors psychological,
fundamental, and political factors.
Seasonality in statistics
In statistics, the request - or the sales - of a given product tend to display seasonality when the
time-series show a predictable periodic variation depending on the time within the year.
Seasonality is one of largest frequently used statistical patterns to develop the accuracy of
request forecasts. Each part of the year has a specific reason for its seasonality. Also every
market has its specific reasons for seasonal tendency. For example, retail sales behave to peak
for the Christmas season and then decline after the holidays. So time series of retail sales will
typically display increasing sales from September till December and declining sales in
January and February.
Illustration of seasonal time-series
If seasonality is present, it must be incorporated into the time series model as in the following
graph. The seasonal component of a time series is defined as the internal variation that is
duplicated constantly. If the seasonal factors increased from year to year, it will be too large,
and then the seasonal factors will introduce deformation into the model.
Fig 1 Time-series example
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Time-series are collected at the weekly level over a period of 159 weeks (roughly 3 years).
The data show weekly shipments for 4 distinct products from the warehouse of a big
European retailer. The first day of the year (January 1st) is displayed with a gray vertical
marker. The historical data displayed in red while the marked forecast is displayed in purple.
The seasonality can be visually marked as a similarity of the patterns from one year to the
next; use the gray markers as references.
About Tadawul (Saudi Arabia stock exchange)
Saudi joint stock companies had their starts in the mid 1930’s, (tadawul, 2012)"when the
"Arab Automobile” company was based as the first joint stock company. By 1975 there were
about 14 public firms. The fast economic expansion, besides the Saudisation of part of the
foreign banks capital in the 1970’s led to the establishment of a number of great corporations
and joint stock banks. The market stayed informal, until the early 1980’s when the
government began on forming a regulated market for trading together with the required
systems. In 1984, a Ministerial Committee consisted of the Ministry of Finance and National
Economy, Ministry of Commerce and Saudi Arabian Monetary Agency (SAMA) was formed
to regulate and improve the market. SAMA was the government body charged with
regulating and monitoring market activities until the Capital Market Authority (CMA) was
established in July 2003 under the Capital Market Law (CML) by Royal Decree No. (M/30).
The CMA is the sole regulator and supervisor of the capital market, it issues the required
rules and regulations to protect investors and ensure fairness and efficiency in the market".
TASI (Tadawul All Share Index) is the only stock exchange in Saudi Arabia. It is supervised
by the capital market authority.
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Fig 2. TASI Tadawul All Share Index.
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II. Literature Review
There is a vast literature on Seasonality & effects for the stock returns. Among studies
investigating the month of the year and the day of the week effects for the U.S. market
Seasonality or calendar anomalies such as month of the year and day of the week effects has
stayed major topic of interest for research since long time in improved as well as developing
countries.
(Rozeff, 1976) Rozeff, Michael S., and William R. Kinney documented the January effect in
New York Exchange stocks for the interval 1904 to 1974. They found that average return for
the month of January was higher than other months displaying pattern in stock returns.
Researchers have also documented half- month effect in literature. Many studies have
documented that daily stock returns in first half of month are significantly larger than last half
of the month. (Ariel R. A., 1987) Ariel reported a study using US market indices interval
from 1963 to 1981 to display this effect.
(Zeimba, 1991) Zeimba reported that returns were relatively higher on first and last four days
of the month.
The holiday effect shows the higher returns around holidays, basically in the pre-holiday
interval as compared to returns of the normal trading days. (Smidt, 1988)Lakonishok and
Smidt documented Dow Jones Industrial mean and reported that half of the positive returns
happened during the 10 preholiday trading days in each year. Ariel (Ariel R. A., 1990)
studied it by using US stock market that more than one-third positive returns per year
registered in the 8 trading days previous to a market-closed holiday. (Husain, 1998)Husain
showed Ramadan effect in Pakistan stock market. He remarked significant decline in stock
returns volatility in Ramadan, although the mean return indicates no significant change
Returns volatility in the Islamic calendar month of Ramadan. However, the average return of
this month is negative, but not statistically significant in Pakistan. His sample period studied
the years from 1989 to 1993.
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III. Seasonality and the Saudi stock market
Saudi stock market existed on dates back to 1970s. Saudi Arabia follows the Islamic
calendar, which is grounded on a lunar calendar, displayed as the Hijri calendar.
There is seasonality in the stock returns according to the Hijri calendar in month as in
Ramadan and day as in Eid-El-Fitar and Eid-El-Adha.
Ramadan is the ninth month of Hijri calendar. The working hours of the offices and business
activity decreased. Muslims celebrated Eid-El-Fitr after the end of the Ramadan. People buy
new cloths, and decorated their houses.
It is observed that, there is an increase in food prices, prices of cloths and prices of other
goods during this month. People behave during this month ultimately impact on financial
market trading activity. The prices become normal after celebrated Eid-El-Fitar. In month of
Zu-ALHajj, people butchered animals such as cow, goat, and camels, to celebrate by Eid-ElAdha. That increases the consumption of people, which reduces the purchasing capacity
hence saving decreases.
Due to those changes in these months as compared to other month, it is interesting to discuss
the behavior of trading activity under those situations.
Seasonality in Saudi Arabia (according to Jadwa Investment 2012) has a significant effect on
listed company performance and on economic activity. The slowdown in activity in the third
quarter as a reason for the long hot summer is a key lead to seasonality. Although the effect
on company earnings can be vast, the seasonal deformations appear to be factored into share
prices.
While retailers/wholesalers sell-on most of their goods at this time, some products must also
be grasped back to avoid stock-outs later in the year. The winter holidays can be even busier
than Ramadan by depending on the retailer, with other peaks in September (back to school)
and in late spring (the traditional sales period). With the Hijri calendar based on the
periodicity of the moon, the timing of these seasonal sales does move slightly every year.
Quarterly earnings from 2004 for each of the 15 sectors of the market have been examined to
discuss seasonal returns. The hypothesis is that under normal situations earnings would grow,
so most emphasis on the times has been placed when quarterly earnings have fallen. For the
total market, earnings have fallen 11 times in the past 32 quarters. Seven of these 11 events
have occurred in the fourth quarter.
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Fig3.( TASI) period from 2004-2012. (Analysis, 2012)
Fig.4 quarterly earnings growth from 2004-2012 (investment, 2012)
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Although Eid al-Adha has come in the fourth quarter in recent years, the decline is firstly
because firms choose to clean up their balance sheets to begin the New Year.
This is specifically the case with banks, with supplying for nonperforming loans usually
peaking in the fourth quarter. Other companies also undergo to write-off bad loans or
investments in the final quarter. Seasonal returns are also predominant in the third quarter.
Summer in the Kingdom leads to slow activity. Hot weather prevents physical activity and
supports many residents to take vacations. In recent years, the summer slowdown has been
stimulated by Ramadan and Eid al-Fitr. The effect of the summer is biggest for those firms
that rely on outdoor labor, or that give inputs to these firms. For instance, earnings of cement
firms have fallen in the third quarter in six of the last eight years. Very hot summer causes
cement to set fast and limits the hours build workers can work outside.
IV.
.Saudi Electricity Company (SEC)
Company Activities (tadawul, 2012)
"The objectives of the company are to generate, transmit and distribute electric power in
the Kingdom of Saudi Arabia either by itself or through its wholly or partially owned
subsidiaries."
Company History (tadawul, 2012)
"A kingdom-wide joint stock company has been created according to the Royal
Decree/16 dated 6/9/1420(H) and in accordance with the Minister of Commerce
resolution No. 2047 dated 30/12/1420 for establishing the Saudi Electricity Company a
Saudi joint vent "
Summer has the opposite effect on the energy sector whose profits are strongly affected by
use of air conditioning.
SEC moves to make losses in the fourth and first quarters, tend into earning in the second
quarter and give its highest profits for the year in the third quarter, when the hot weather, and
therefore the use of air conditioning. In recent years Ramadan and Eid al-Fitr have come in
the third quarter. The generally reduced working hours and long holidays stimulates the effect
of summer on sectors that are strongly reliant on labor.
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Fig 5Saudi Electricity Company (2004-2012) (Analysis, 2012)
Fig6. Profits of Saudi Electricity Company. (investment, 2012)
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V. CONCLUSION
The concept of seasonality is much reported and documented in the stock market returns.
It is complex and has wide ranging effect on the economy of countries. We found that the
variation in climate is one of strongly seasonal effects that companies influenced in their
stock market. Saudi stock market has other seasonal retunes in month of the year as in
Ramadan or days of month like both Eids. Thus we find a push from companies to conclude
deals and projects ahead of the summer slowdown; the second quarter is generally the peak
time for private sector activity in the Kingdom. Profits in eight of the 15 sectors peaked in the
second quarter. It is the quarter in which most projects are recompensed and the prime season
for conference and fairs.
Growth in the Saudi Electricity Company, is regular with the financial performance with
output falling in the fourth and first quarters as temperatures and therefore use of air
conditioning rests..
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VI. . References
1.
Analysis, A. S. (2012). TASI. Saudi Arabia: http://www.asmainfo.com.
2.
Ariel, R. A. (1987). A Monthly Effect in Stock Returns. Journal of Financial, 161–
74.
3.
Ariel, R. A. (1990). “High Stock Returns before Holidays. Journal of Finance,, Vol.
45, pp. 1611–25.
4.
Czinkota, M. &. (IA 1998,). In C. Ronkainen, International Marketing, 5th edition,
Harcourt brace college,. Florida, USA.
5.
Husain, F. (1998). A Seasonality in the Pakistani Equity Market: The Ramdhan. The
Pakistan Development ReviewEffect, Vol. 37 no.1, pp. 77-81.
6.
Investment, j. (2012). seasonality . saudi Arabia: www.jadwa.com.
7.
S. (1976). Capital Market Seasonality: TheCase of Stock Market Returns. Journal of
Financial EconomicsVol. 3, pp. 376-402.
8.
Smidt, L. J. (1988). Are seasonal Anomalies real? A ninetyyears perspective. The
Review of Financial Studies,, Vol. 1, No. 4. pp. 403-425.
9.
10.
tadawul. (2012). about tadawul . Saudi Arabia: www.tadawul.com.
Zeimba, W. (1991). “Japanese Security Market Regularitie:Monthly, Turn of
theMonth and Year, Holiday and Golden Week Effects”. Japan and World Economy,
119-146.
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