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Unlocking liquidity through shortened settlement cycle: Empirical evidence from India

Author

Listed:
  • Bhanu, Aniket
  • Nath, Golaka C
  • Patnaik, Tirthankar

Abstract

Many jurisdictions across the world are considering shortening the settlement cycle in equity markets from T + 2 to T + 1 with the primary objective of promoting investor protection, reducing risk and improving efficiency. In addition to achieving these objectives, shortened settlement cycles also lower the funding liquidity demand with lower margin requirements, which could unlock liquidity in less liquid stocks. Using the data from Indian markets, which incrementally migrated securities from T + 2 to T + 1 each month, we construct a series of quasi-natural experiments and find that shorter settlement cycles improve market liquidity, and the improvement in liquidity is greater for stocks with smaller market capitalization. Shortening of settlement cycles can be a path to improving overall liquidity and widening its availability to illiquid stocks.

Suggested Citation

  • Bhanu, Aniket & Nath, Golaka C & Patnaik, Tirthankar, 2024. "Unlocking liquidity through shortened settlement cycle: Empirical evidence from India," Economics Letters, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:ecolet:v:239:y:2024:i:c:s0165176524002192
    DOI: 10.1016/j.econlet.2024.111736
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    2. Bige Kahraman & Heather E. Tookes, 2017. "Trader Leverage and Liquidity," Journal of Finance, American Finance Association, vol. 72(4), pages 1567-1610, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Settlement cycle; Liquidity; Capital markets;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G1 - Financial Economics - - General Financial Markets

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