Did Demonetization Affects Indian Stock Market? A Short-Term Analysis

Abstract

In this paper, We analyze the shocking episode of “2016 demonetization” in India. The policy declared 86% of cash in circulation in the form of INR 500 ($7.5) & INR 1000 ($15) notes as an illegal tender effective from the midnight of November 8, 2016. However, the government of India gradually introduced new notes of INR 500 and INR 2000($30) over the next several months, this is considered as one of the biggest macro-economic shock happened at a stable economic environment. Following demonetization announcement, there was a rapid decline in the stock prices of cash- sensitive sectors like consumer goods, financial services, signaling lower market expectation of a fall in demand. However, demonetization has affected the purchasing power which sharply declines the demand for various goods and services in the economy. Therefore, this paper focus on the short-term impact of demonetization announcement on stock price of 100 publicly listed firms in India using daily data. To capture short- term announcement effect, We use estimation window ranges from one week after the announcement to 60 days. Ordinary Least Square (OLS), Fixed Effect (FE) and Random Effect (RE) estimation techniques are used in this study. The results found that the announcement effect of demonetization sharply decline the stock prices of the Indian firms. To control heterogeneous effect among the firms, this paper divide the firm into “Economic Financial sectors” and “other sectors” and found that stock prices severely affected by the demonetization announcement in short-term.