The Effect of Settlement Regimes on Trading Cost and Market Efficiency: Evidence from the National Stock Exchange

Macroeconomics and Finance in Emerging Market Economies, Vol. 3, No. 1, pp. 119-130, 2010

Posted: 17 Oct 2010

See all articles by Manoj Dalvi

Manoj Dalvi

Long Island University - Department of Finance

James F. Refalo

California State University, Los Angeles

Golaka C. Nath

Clearing Corporation of India - CCIL

Date Written: October 17, 2010

Abstract

Using data from 65 of the most actively traded stocks from the National Stock Exchange of India we study the relationship between impact cost and three indicators of market efficiency under different settlement regimes. Our data is uniquely suited for this study because it encompasses a transition by the National Stock Exchange of India from fixed to rolling settlement. As a by-product of our study we are able to examine inefficiencies related to the day of the week on which trades are conducted for different settlement regimes. In summary our data reveals that rolling settlement reduces aggregate impact costs, leading to greater market efficiency. Employing a fixed effects model we show that impact cost has a stronger relationship to our indicators of market efficiency under rolling settlement. However, we find evidence of two structural inefficiencies related to the day-of-the-week on which trades are conducted: 1) under rolling settlement, trades conducted earlier in the week (and settled by Thursday) have lower impact costs, and 2) there is an impact cost premium for Friday trades.

Suggested Citation

Dalvi, Manoj and Refalo, James F. and Nath, Golaka C., The Effect of Settlement Regimes on Trading Cost and Market Efficiency: Evidence from the National Stock Exchange (October 17, 2010). Macroeconomics and Finance in Emerging Market Economies, Vol. 3, No. 1, pp. 119-130, 2010, Available at SSRN: https://ssrn.com/abstract=1693326

Manoj Dalvi

Long Island University - Department of Finance ( email )

720 Northern Blvd.
Brookville, NY 11548
United States
516-299-2308 (Phone)

James F. Refalo (Contact Author)

California State University, Los Angeles ( email )

Los Angeles, CA
United States

HOME PAGE: http://instructional1.calstatela.edu/jrefalo/

Golaka C. Nath

Clearing Corporation of India - CCIL ( email )

India

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