Dematerialisation of Equity Shares in India: Liquidity, Returns and Volatility

Dematerialisation of shares is an important milestone in the annals of Indian Capital Markets. Understanding and measuring the impact of it on various segments is necessary since it stirred the microstructure of Indian capital markets in general and stock exchanges in particular. Demand and Supply forces determine prices of a product. Liquidity plays an important role in the interplay of demand and supply forces. The impact of dematerialisation on liquidity in the Indian stock exchanges is quantified and analysed. Quality of shares changed for better owing to dematerialisation and thus investors are expected to earn higher returns as a natural step, albeit, for sometime only. Changes in quality of shares are expected to cause changes in demand and supply for shares, which in turn, influences, the levels in share prices (volatility). All these three issues are studied in the present paper. Liquidity and returns improved substantially in the post-demat period while volatility was very much below the daily changes permitted.