Did Demonetization Affect Indian Stock Market?

This study explores the impact of ”2016 demonetization” on the stock market in India. The policy declared 86% of cash in circulation in the form of Indian rupees (INR) 500 & 1000 notes as an illegal tender effective from midnight of November 8, 2016. However, India’s government progressively released new 500 and 2000 INR notes over the next few months. Following the demonetization announcement, stock prices of cash-sensitive industries like consumer goods and financial services dropped rapidly, reflecting a significant reduction in demand. This study focuses on the short-term effects of demonetization on the stock prices of 100 publicly listed firms using their daily stock data. We use estimating windows within 60 days of the announcement and then capture the short-term effects of demonetization by employing the Ordinary Least Square (OLS), the Fixed Effect (FE), and the Random Effect (RE) methods. Estimation results demonstrate that demonetization effectively decreases stock prices.

This study explores the impact of "2016 demonetization" on the stock market in India. The policy declared 86% of cash in circulation in the form of Indian rupees (INR) 500 & 1000 notes as an illegal tender effective from midnight of November 8, 2016. However, India's government progressively released new 500 and 2000 INR notes over the next few months. Following the demonetization announcement, stock prices of cash-sensitive industries like consumer goods and financial services dropped rapidly, reflecting a significant reduction in demand. This study focuses on the short-term effects of demonetization on the stock prices of 100 publicly listed firms using their daily stock data. We use estimating windows within 60 days of the announcement and then capture the short-term effects of demonetization by employing the Ordinary Least Square (OLS), the Fixed Effect (FE), and the Random Effect (RE) methods. Estimation results demonstrate that demonetization effectively decreases stock prices.  RBI (2017) reported that 99% of the demonetized cash has arrived at the end of April 2018, which shows that the main objectives of the demonetization were not properly achieved. After the demonetization announcement, the RBI spent roughly $130 billion to remonetize the Indian money market over the next few years. The overall cost of printing new and old notes 3 surpassed the total value of the demonetized money, raising many questions about the aim of demonetization. Furthermore, India's cashless payment initiative did not improve significantly after demonetization. According to a study conducted by Mukhopadhyay (2019)

Data Sources
This study uses daily data from November 8, 2014 to Additionally, the Global Industry Classification Standard codes are obtained from Compustat to match the firms with their respective sectors and to create sub-samples. Moreover, we define five windows of period 7-days, 14-days, 21-days, 30-days and 60-days after demonetization to capture the average effect of demonetization on stock prices. Table 1 presents the summary statistics of the target and features used in this paper.

Empirical Methodology
It is generally observed that macro-economic shocks bring some degree of spillover effects into

Ordinary Least Square
We define the following Ordinary Least Square (OLS) equation to capture the impact of demonetization on stock prices.
where, Y it presents the stock prices of firm i at time e it represents innovation term.

Fixed Effect
One of the advantages of using panel data is its ability to control unobserved fixed effects. Given the demonetization design, the fixed effect approach, in this case, allows to control time fixed effect, where, Y it presents the stock prices of firm i at time t, while is a dummy variable for firm i at time

RESULTS AND DISCUSSION
Now we will look at the evidence that demonetization affected the stock prices of 100 publicly traded Indian firms.   Table 4. Column (1) to Column (5) contain the estimated coefficients of five regression models using dummies, namely 7-days, 14-days, 21-days, 30-days, and Post 60-days, respectively, using equation (3). From

Estimation across Sectors
Moreover, we divide firms according to their nature of business using Global Industry Classification Standard codes to capture the impact of demonetization across the sectors In Table 5 it is observed that demonetization has a large negative significant effect on the economic and financial sector, signalling that restrictions on cash transactions reduce the demand for the products.
Tables 5, 6, and 7 present ordinary least square, fixed       However, this study focused on the short-term impact of demonetization. It concludes that within the employed window length of estimation, the stock prices of given sample firms are significantly affected due to a sudden decline in cash activity over several months after the demonetization announcement. Furthermore, the current study can be extended by incorporating more firms into the sample and creating sub samples of more firms regarding their nature of business.