Impact of Demonetization on Stocks of Selected Sectors – An Event Study

Demonetization is an act of seizing a currency unit of its status as legal tender. Demonetization is necessary whenever there is a need to change national currency. The government claimed that the action would “curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism”. Demonetization in India and President Election in US affected stock market, where market indices dropped to six months low in the week following the announcement of demonetization. BSE crashed around 1689 points and NIFTY over 541 points. Hence there is a need to understand how much the demonetization has affected the stock prices and to analyse the stock price movement pre and post demonetization.

The Objectives of the study were (a) to measure the returns of the selected stocks, pre and post demonetisation, using Holding Period Return and BHAR,(b)to find the expected returns of the selected stocks pre and post demonetisation, using CAPM Model and (c) to study the impact of Demonetization on stock prices of selected sectors. This study focuses on impact of demonetization on stock prices of 5 selected sectors, Automobiles, Banking, Consumer Durables, Telecommunication and Real Estate. 5 companies in each sector were considered for this study. The closing prices of stocks for last 6 months were used to find the returns, starting from 7th September 2016 to 8th march 2017 which consists of data of 2 months before demonetization and 4 months after demonetization. Realised return, CAPM Return and BHAR analysis has been carried out in the study. Using ANOVA on the BHAR in the three windows, it was concluded that demonetisation had no impact on stock returns during the study period