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Settlement cycle and day of the week anomaly: empirical evidence from Indian stock market

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Abstract

Indian stock market was functioning with Accounting Period settlement cycle till December 31, 2001. But as per the recommendation of G-30 which was a group to determine the best international practices for securities clearing and settlements, Indian stock market has adopted T+2 rolling settlement cycle on April 1, 2003. Difference of settlement and clearing cycles of different stock exchanges might lead to the day of the week anomaly. Day anomaly in return and volatility of stock market was found to be affected by settlement cycle, and it changes over the period of time. Therefore, present study tries to investigate the effect of introduction of T+2 settlement cycle on day of the week anomaly in return and volatility of Indian stock market. Study analyzes daily closing price data of Sensex and Nifty over the period January 2, 1991 to January 31, 2013 covering 5,763 samples. Study computes descriptive statistics of each week days for both subperiods as well as for complete sample period. It also applies GARCH (1, 1) model for investigating the presence of day of the week effect in both return and volatility of Indian stock market. Empirical result reveals that before introduction of T+2 settlement, returns of Monday and Thursday were negative, while after the introduction of T+2 settlement, returns of all days are positive. By applying GARCH model, this study concludes that after the introduction of T+2 settlement, day of the week effect exists only in return of Indian stock market, but it does not exist in volatility of Indian stock market.

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  1. Goa Institute of Management, Sanquelim Campus, Poriem, Sattari, 403505, Goa, India

    Samveg A. Patel

  2. Institute of Management, Nirma University, Sarkhej-Gandhinagar Highway, Ahmedabad, 382481, Gujarat, India

    M. Mallikarjun

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Patel, S.A., Mallikarjun, M. Settlement cycle and day of the week anomaly: empirical evidence from Indian stock market. Decision 41, 327–337 (2014). https://doi.org/10.1007/s40622-014-0050-4

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