The Holiday and Yom Kippur War Sentiment Effects: The Tel Aviv Stock Exchange (TASE)

Abstract

Several empirical studies reveal that holidays generally create positive sentiment in the stock market, whereas negative events, such as wars or disasters are accompanied by negative sentiment. However, what happens if a negative event occurs on a holiday? In such a case, we expect two conflicting sentiment effects, which may cancel one another out or alternatively, one effect may dominate the other. The stock market in Israel provides a unique laboratory in which to test these two conflicting effects, as Israel faced a horrible war on the Yom Kippur holiday in 1973 — a war whose influence is still strongly felt today. Indeed, we find two robust effects: A strong and significant positive holiday sentiment effect; and a negative war sentiment effect, which dominates the positive holiday effect. These results, which show how sentiment effects are created, are general and can easily be applied to other events and other markets when conflicting sentiment effects occur.

Keywords: risk sentiment index (RSI), behavioral finance, perceived risk, market anomalies, market efficiency

JEL Classification: A12, G1, G10, G12, G14