Analyzing the Impact of Demonetization on the Indian Stock Market: Sectoral Evidence using GARCH Model

摘要

On 8th November 2016, the Government of India demonetized its two highest currency notes in the denomination of Rs. 500 and Rs. 1000. The purpose of demonetization was to tackle the corruption and black money prevailing in the country. The stock market is one of the areas which pools a large amount of funds, the present study is an analytical attempt to examine the impact of demonetization on Indian stock market. For the purpose of the study, various statistical techniques have been used such as Graphical Analysis, Summary Statistics (i.e. Mean, Standard Deviation, Skewness, and Kurtosis), Augmented Dickey-Fuller Test and GARCH Model. The study utilizes the GARCH model to examine the impact of demonetization on Nifty 50 Index and across sectoral indices in India considering a period of 200 days prior and post event date by framing necessary dummy variables. The study found the data to be stationary using the Augmented Dickey-Fuller Test. A significant negative impact of demonetization on stock market returns was evidenced from Nifty 50 Index and sectoral indices such as Nifty Auto Index, Nifty Financial Services Index, Nifty FMCG Index, Nifty IT Index, Nifty Media Index, Nifty Private Bank Index, and Nifty Realty Index. The study found the Nifty Realty Index to be affected most because of demonetization. The results of the study will help the Governing bodies to examine the impact of demonetization and frame necessary policies. The results will also be useful for investors and other market participants for framing investment and trading strategies.