Changes in settlement regime and the modulation of day-of-the-week effects in stock returns

Abstract

During the period 1989 to 1996, the New Zealand Stock Exchange modified the settlement regime of its listed stocks on six separate occasions. These changes provide an opportunity to assess the impact of settlement practice upon day-of-the-week returns in a more meaningful fashion than has, hitherto, been the case. The time-series approach suggested avoids many of the confounding effects, pertaining to differences in market micro-structure and trading characteristics, that plague inferences drawn from cross-market analyses. The precise impact of settlement on day-of-the-week returns is assessed using a methodology incorporating orthogonal contrasts. This approach avoids issues of multiple-testing and, as a result, offers new insights into the influence of settlement regimes on day-of-the-week returns. The results indicated little support for priors determined from standard settlement arguments. However, as in other markets, a depressed Monday return was evident.