Diwali Anomaly Excess Returns in the Indian Stock Market

Posted in Finance Articles, Total Reads: 4393 , Published on October 26, 2011

`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 analysing 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 reflect fully 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 confirm 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 tends to exist which goes against the efficient market hypothesis. The researchers have used 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, Hebrew calendar is followed by Jewish society, which is strictly based on luni-solar, the Christian society follows Gregorian, which is based on solar, similarly Hindu and Chinese follow their own.

The Hindu Calender is called “Panchanga” and it is based on both movements of the sun and the moon. The festival called “Diwali” is typically found during the end of October and beginning of November.

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 at it on a positive note. It marks an auspicious beginning to the Hindu New year. 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.

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 know the effect of the festival prior and post diwali on the the returns.

Econometric methodology

I have measured stock return as the continuously compounded daily percentage change in the share price index (S&P CNX NIFTY) as shown below:

Rt = (lnPt – lnPt-1) x 100 ……………………(1)

where, Rt = return at time t

Pt, Pt-1 = closing value of the stock price index at time t, t-1.

I have used S&P CNX Nifty as it has got the most liquid stocks in its portfolio. Further, the National Stock Exchange is largest in terms of Market capitalisation and Volume. I have used the data of the returns of 8 trading days(inclusive of Mahurat trading day) and 7 trading days after Mahurat trading (excluding Mahurat trading day). Further, I have used Paired t-test in order to check whether there is an existence of positive returns post Mahurat Trading days.

The empirical findings and interpretation

The Paired t test was applied to the data relating the period as specified earlier. The preliminary findings from the below data suggests that the mean returns are greater as compared to the mean returns prior to Mahurat Trading days.

Table 1 : Results of the test Pre and Post Diwali (7days periods)

Ho: Mean(W2-avgw1mh) = 0

Ha: Mean(W2-avgw1mh) ≠ 0

At 90 % confidence interval we reject the null hypothesis that mean difference between average returns of 8 days including Diwali is statistically significant as compared logarithms average of the post 7 days after mahurat trading. Thus, we can say that the returns post mahurat trading is higher as compared to 8 days prior to it.

In order to avoid the existence of sample bias and data mining I have checked for out of sample data for 15 and 20 days and came out with the same results with 90% confidence interval.

Volume Change

I have checked the mean of volume post trading which is higher as compared to pre mahurat trading days. There is a surge in the trading activity during this period.


We can infer from the above data that there is an existence of excess returns post mahurat period. The findings are similar to that of CNY effect (Chan et al,1996).

In India also we have trend of distribution of bonuses to the employees. The enterprise might have liquidated their investment portfolios which results in the decline of their stock prices which is reflected in the index. The investors have excess cash bonuses would flock the market taking various positions driving up the volatility in the market. Secondly, newspaper gets flooded with the various buy recommendation by the brokers which may lure some of the investor during the period as they have cash balances. Thirdly, there are various brokers which tend to buy in token amount of shares which not severely affect the index during the period prior to diwali. Fourthly, the people are cash strapped pre Diwali as there are large number of expenses made by them. As we know that one person’s expenses is another person’s income. The money goes into the hands of various sellers of goods in the market. They have excess cash post this period which is reflected in the trading activity (volume). These people invest in the stock market driving the volume and returns on the exchange.

De Bondt, Werner F. M., and Richard THALER, 1985. Does the Stock Market Overreact? The Journal of Finance, 40(3), 793-805.
Fama, E. F. (1970), "Efficient Capital Markets: A review of Theory and Empirical Work." Journal of Finance 25, 383-417.
Bachelier, L. (1900), Theory of Speculation. Reprinted in English (1964). "The random character of stock market prices." Cambridge: MIT Press.
Caginalp, G. and H. Laurent (1998). The predictive power of price patterns.
Applied Mathematical Finance 5, 181-205. 4, 67
Chan, M. W. L., A. Khanthavit, and H. Thomas. 1996. Seasonality and cultural influences on four Asian stock markets. Asia Pacific Journal of Management, 13:1-24.
http://www.sanskrit.org/www/Hindu%20Primer/hinducalendar.html contains the information on Hindu calendar.


This article has been authored by Umesh Kumar from IIFT

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