Return, Volume and Volatility Relationship in Indian Stock Market: Pre and Post Rolling Settlement Analysis

The present article examines the impact of rolling settlement on contemporaneous and causal relationships between return, volume and volatility in Indian stock market using daily data of closing prices and volume of NIFTY index of NSE and SENSEX of BSE from January 1997 to June 2007. The correlation analysis reveals that contemporaneous relationship is not detected between volume and returns in post rolling settlement period for both NIFTY and SENSEX. Positive relationship between volume and return has been seen in only pre-rolling settlement period in both indices (NIFTY and SENSEX). This indicates that markets have become more efficient after introduction of rolling settlement. In addition, causality results also provide conclusive evidence of improvement in efficiency at NSE and BSE with the introduction of rolling settlement. Thus, rolling settlement makes shares more attractive; investors would be more willing to supply risk capital in the country if they know that shares can be rapidly converted into cash when need arises. Moreover, noise created by prices has been reduced with reduction in settlement days.