The Settlement Day Effect in the French Bourse

Abstract

This article investigates the market-microstructure implications on stock returns and volatility of the settlement procedure of stock transactions. The question is, to what extent can a practical trading rule be implemented around the settlement day, to yield above normal risk-adjusted returns, when settling stock transactions is delayed by several weeks, e.g., a month, on the French stock market?

Based on French data for the period 1987–1989 we observed, on average, a positive jump of stock prices between the close of the settlement day and the opening of the next trading day (0.97%) which was significantly greater than the one-month interest rate. The average of daily rates of return for non-settlement days was slightly positive (0.01%). These results are found to be very robust. We thus reach the conclusion that buying stocks on the close of the settlement day and selling them back the next day should have been, on average, a profitable strategy in the French Bourse during the period 1987–1989. However, transaction costs and risk premiums may reduce or even eliminate the recorded profit potential.