An Empirical Study on Effect of Demonetization on NSE Bank Nifty Stocks using Event Study Methodology

 

Pavan Kumar S. S.

Assistant Professor, Department of Management Studies, Ballari Institute of Technology and Management, Ballari-583104, Karnataka, India

 

ABSTRACT:

This study investigates stock market effect to Demonetization on Banking stocks to find out if the Indian stock market is semi-strong efficient or not using the standard event study methodology. The methodology used is event study under the market model. Samples of 12 stocks are considered from banking sectors. The results indicate that there are significant positive abnormal returns prior to Demonetization announcements. On the day of Demonetization announcement for the only Bank of Baroda and Canara Bank, On the day of Event 0 the negative returns as observed for, IndusInd Bank (-0.8), Axis Bank (-1%), Yes bank (-0.8) ,HDFC Bank (-0.2%) ,ICICI Bank (-0.8%), The significant positive returns on the event are found for PNB (8.7%) IDFC Bank (1.3%), SBIN (4%) Canara Bank (2.8%), Kotak bank (1.2) %, Bank of Baroda (2.3%) Federal bank (0.2%). Hence the significant abnormal returns for all the stocks of Banking are not uniform across the Banking sector.

 

 

 

1.                  INTRODUCTION

Indian banking industry plays an important role in supporting economic growth and also the backbone of the country’s economy, has always played a positive key role in prevention the economic disaster. Since the banking industry is under the control of Reserve Bank of India (RBI), it is adversely used as the tool to control the external problems like inflation, interest rate, and money supply. Demonetization has been the buzz word since November 8th 2016 when our Prime Minister made the historic announcement about the decision to discontinue the 500 and 1000 rupee notes. This historic decision has affected almost all the sectors.

 

Some have benefited while others have suffered. This paper intends to analyze the effects of demonetization on the major financial institutions and the Indian economy in general.

 

 

2.                  REASONS FOR DEMONETIZATION IN INDIA:

In a single master stroke, the government has attempted to tackle all three malaise's plaguing the economy, a parallel economy, counterfeit currency and terror financing. The main reasons for demonetization are: 1. To tackle black money in the economy. 2. To lower the cash circulation in the country this “is directly related to corruption in our country, 3. To eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism

 

3.                  EFFECTS OF DEMONETIZATION ON BANKING SECTOR:

Since the advent of asset quality review (AQR), there has been a rise in the number of NPAs. To get an idea, the GNPA of banks is 6 lakh crore as of June, 2016 which is 8.2% of the total loans1. These are only the NPAs as there are an equal number of restructured loans which might transform to NPAs in future.

 

 

A recent data provided by the Finance ministry, which has been depicted in Figure 1, shows that 5.3 lakh crore of the 6 lakh crore NPAs are under the public sector banks. It’s clearly visible that there has been a rise in the NPAs from October 2015. This can be attributed to the ever greening of loans which led to the creation of a distorted picture of the banks. Though the asset quality review led to the identification of such NPAs which were previously classified as standard, the problem of NPAs existed since the 2008 financial crisis but remained hidden due to the above mentioned reason.

 

 

Figure 1: Total NPAs as of March 2016, Source: Finance Ministry

 

4.                  LITERATURE REVIEW:

T. Mallikarjunappa and Shaini Naveen (2016) conducted a study on Comparative Analysis of Risk and Return with Reference to Stocks of CNX Bank Nifty. This study analyzes the risk and returns in the banking sector. They compare the performance of the 12 listed banks in the Nifty Bank Index. The study also analyses the performance of banking stocks mainly to understand the required rate of return and risk of a particular stock based on different risk elements prevailing in the market and other economic factors.

 

Dr. M. Muthu Gopalakrisnan and Dr. K. V. Ramanatan (2013) conducted a Study on Volatility in Indian Stock Market–A Study of Post and Prerecession Period. In this study, the Researchers try to analyse price fluctuation in Indian stock market. Estimating the volatility in the market will help the investors in estimating or calculating their risk. They analyse the volatility of sectoral index listed in Nifty as on 28-03-2013 using daily opening price, closing price, high and low prices of 31 selected companies. This study helps in identifying volatility relationship during Pre-Recession and Post-Recession period.

 

Sangeetha (2017) Benefits of Demonetization: Rich and Poor : The benefits are much dominating and it will be in the long term interest of our country. Government need to take all the necessary steps so s to ensure that there will be a turn into chaos if government takes no necessary steps to circulate in our economy. We congratulate the entire government and those hidden brains of our democracy that brought this decision. Dr. S. M. Jayasudha and Dr. M.Thangavel (2017) (conducted an empirical Study on the Major Problems Faced Due To Demonetization by the Small Retailers in Erode City: Thus it is clear from the research that due to demonetization most of the small retailers have faced many difficulties while dealing with banks. However, this is not a permanent condition. The economy is expected to recover soon after the circulation of new currency notes.

 

Vedashree Mali(2016) conducted research on Demonetization: A step towards modified India: Demonetization though it has created some positive and some negative impacts on different sectors but in long run it definitely will have positive impact in controlling black money and fake money.

 

5.                  OBJECTIVES OF THE STUDY:

·         To examine the behavior of stock prices around the Demonetization announcement using event study methodology.

·         To assess the stock returns in terms of change in market value around Demonetization announcement for companies listed on NSE Bank Nifty.

·         To test the speed with which Demonetization announce­ments are absorbed by the companies listed on NSE Bank Nifty.

 

6. DATA AND METHODOLOGY:

·         The sample of the study comprises of constituents of NSE BANK NIFTY as of December 2016.

·         Twelve large and liquid stocks have been observed during January 2015 to December 2016 in the sample stocks.

·         Standard event study methodology as per the market model, the steps of which are given in the estimation procedure below has been used for the research.

·         The event date is the announcement of Demonetization date November 8th 2016.

·         The event window is taken as t=-10 to t=+10 rela­tive to the event day t=0. This window will help in studying the stock price behavior pre and post the event.

·         Estimation window will help in estimating the relationship The estimation window is t=-232 to the event day t=0.

·         The event window for the present study ,we studied 20 days around the event, the we would designate-10,-9,-8,-7,-6,-5,-4,-3,-2,-1,-as prior to the event, 0 as the event day, and+1,+2,+10 as the 10 days after the event. This window will help in studying the stock price behavior pre and post the event.

·         In this study 20 days (10 days before the event plus the event day, plus 10 days after the event) returns are calculated from 10 days prices along with the benchmark index values are also collected.

·         Return on security j and returns of the index for period t is calculated as

·         Current Daily Return=(current day close price–previous day close price)/previous day close price.

·         Excess Return is obtained as follows: Actual Return–Expected Return

·         The Average Abnormal Returns (AARs) are com­puted by averaging the abnormal returns of the sample companies for each day of event period.

·         The Cumulative Average Abnormal Returns (CAARs) are the sum of daily Average Abnormal Returns (AARs) during the event window.

·         The average abnormal returns in all the trading days in the event window and cumulative average abnor­mal returns during the event window are analyzed using descriptive statistics.

 

7.                  SELECTION OF SAMPLE COMPANIES:

In NIFTY Bank index as on 31st December 2016, Bank Nifty represents the 12 most liquid and large capitalized stocks from the banking sector which trade on the National Stock Exchange (NSE). It provides investors and market intermediaries a benchmark that captures the capital market performance of Indian banking sector. The Researcher takes NSE Bank stocks for conducting the study that forms a sample size of 12 companies. The names of those 12 companies are as follows.

 

Kotak Bank, Indus Bank, Axis Bank, Yes Bank, HDFC Bank, Bank of Baroda, Federal Bank, ICICI Bank, PNB, IDFC, SBI.

 

Data collection:

This study is completely based on secondary data mainly collected from the website of NSE (https://www.nseindia.com/).

 

 

 

8.      TABLE SHOWING RETURNS CALCULATION:

Table 1: Abnormal Returns and Cumulative Average Abnormal Returns

	Kotak Bank		Indusind Bank		Axis Bank		Yes Bank		HDFC Bank		Bank of  baroda
Event Time	AR (%)	CAR(%)	AR (%)	CAR (%)	AR (%)	CAR(%)	AR (%)	CAR(%)	AR (%)	CAR(%)	AR (%)	CAR(%)
-10	3.1	3.1	-0.4	-0.4	-8.2	-8.2	-1.6	-1.6	-0.8	-0.8	-0.1	-0.1
-9	-0.6	2.5	-1.7	-2.1	-0.7	-8.9	-3.0	-4.6	1.1	0.2	-0.6	-0.7
-8	1.6	4.1	2.0	-0.2	-0.1	-9.0	1.3	-3.2	0.6	0.8	2.8	2.1
-7	0.0	4.1	-0.2	-0.4	-0.2	-9.2	-0.6	-3.9	-0.4	0.4	0.4	2.5
-6	-1.7	2.3	1.8	1.4	-2.8	-11.9	-1.5	-5.4	0.6	1.0	0.5	3.0
-5	-0.2	2.1	1.4	2.9	-0.1	-12.1	-3.3	-8.7	-1.0	0.0	-2.7	0.3
-4	0.2	2.3	0.3	3.2	-0.5	-12.6	-0.2	-8.9	0.8	0.7	-1.5	-1.2
-3	-0.8	1.5	-0.8	2.4	0.3	-12.3	-1.2	-10.2	-0.9	-0.1	-2.0	-3.2
-2	0.2	1.8	-0.1	2.4	1.1	-11.3	0.8	-9.4	0.5	0.4	4.6	1.4
-1	1.2	3.0	-0.2	2.2	0.8	-10.5	1.4	-8.0	0.4	0.8	1.4	2.8
0	1.2	4.2	-0.8	1.4	-1.0	-11.5	-0.8	-8.7	-0.2	0.6	2.3	5.0
1	-0.4	3.8	1.4	2.8	3.6	-7.8	5.7	-3.0	2.2	2.8	9.9	14.9
2	-0.5	3.4	-1.6	1.2	-2.0	-9.8	-6.0	-9.0	-0.2	2.7	-2.0	12.9
3	-3.2	0.1	-8.1	-6.9	-4.2	-14.0	-4.9	-13.9	-1.6	1.1	9.4	22.3
4	-2.4	-2.3	0.4	-6.5	-1.7	-15.7	2.0	-12.0	-0.8	0.3	0.2	22.5
5	0.7	-1.6	0.7	-5.8	0.0	-15.8	-0.9	-12.9	-1.1	-0.8	1.5	24.1
6	0.4	-1.2	0.3	-5.5	-0.5	-16.2	0.5	-12.4	-1.5	-2.3	2.0	26.1
7	-2.2	-3.4	-3.7	-9.2	-2.0	-18.2	-5.9	-18.3	-1.0	-3.3	-8.2	17.9
8	0.9	-2.5	1.4	-7.8	0.8	-17.5	1.6	-16.8	0.0	-3.3	2.1	19.9
9	-0.5	-3.0	-0.4	-8.2	1.7	-15.7	-0.7	-17.5	-1.1	-4.4	0.1	20.0
10	-3.2	-6.2	-1.7	-10.0	-2.9	-18.6	-0.6	-18.2	-1.6	-5.9	3.8	23.8

 

 

 

Table 2: Abnormal Returns and Cumulative Average Abnormal Returns

	Federal Bank		ICICI bank		PNB		HDFC Bank		SBIN		CAN BK
Event Time	AR (%)	CAR(%)	AR (%)	CAR (%)	AR (%)	CAR(%)	AR (%)	CAR(%)	AR (%)	CAR(%)	AR (%)	CAR(%)
-10.0	2.4	2.4	-3.9	-3.9	1.7	1.7	1.6	1.6	0.1	0.1	-1.3	-1.3
-9.0	0.9	3.3	2.0	-2.0	1.5	3.2	0.6	2.2	-0.2	-0.1	1.8	0.5
-8.0	1.9	5.2	-2.8	-4.8	0.5	3.6	4.0	6.1	2.1	2.1	1.1	1.6
-7.0	1.8	7.0	-0.1	-4.9	0.5	4.1	2.8	9.0	1.0	3.1	1.6	3.2
-6.0	0.9	7.9	-0.8	-5.6	3.5	7.7	0.6	9.5	1.7	4.7	0.8	4.0
-5.0	-1.6	6.4	-1.4	-7.1	2.6	10.3	-0.4	9.1	-1.9	2.8	-4.1	-0.1
-4.0	-1.9	4.5	-1.0	-8.0	1.4	11.7	-0.1	9.0	-1.0	1.8	2.1	2.0
-3.0	1.1	5.6	-0.1	-8.2	-3.0	8.7	-1.5	7.5	0.0	1.8	-0.5	1.5
-2.0	2.3	7.8	3.1	-5.0	-0.6	8.1	2.2	9.6	5.2	6.9	4.7	6.3
-1.0	1.2	9.1	1.4	-3.6	0.9	9.0	0.8	10.4	1.1	8.0	0.7	7.0
0.0	0.2	9.3	-0.8	-4.4	8.7	17.8	1.3	11.7	4.0	12.1	2.8	9.8
1.0	6.8	16.1	3.8	-0.6	2.1	19.9	5.4	17.1	9.3	21.4	8.4	18.2
2.0	-2.3	13.8	-5.7	-6.3	3.2	23.0	1.4	18.6	-1.8	19.6	-1.3	16.9
3.0	-3.1	10.7	-2.6	-8.9	14.0	37.1	-0.1	18.4	3.0	22.6	2.9	19.8
4.0	-0.6	10.1	-1.5	-10.3	-0.2	36.9	1.3	19.8	0.8	23.4	2.7	22.5
5.0	2.4	12.5	0.4	-10.0	1.4	38.2	0.9	20.7	1.2	24.6	2.9	25.4
6.0	-1.3	11.2	-1.3	-11.3	-1.8	36.4	2.0	22.6	0.5	25.1	2.2	27.6
7.0	-4.4	6.8	-1.5	-12.7	1.2	37.7	-3.1	19.6	-5.6	19.6	-4.3	23.3
8.0	5.4	12.3	0.4	-12.3	3.5	41.1	3.1	22.7	1.1	20.7	0.1	23.4
9.0	1.3	13.6	0.7	-11.6	-6.9	34.3	2.0	24.8	1.6	22.3	2.2	25.6
10.0	-1.0	12.6	-2.3	-13.9	2.7	37.0	0.0	24.8	2.3	24.7	1.9	27.5

 

 

 

9.                  DATA ANALYSIS AND DISCUSSION:

From the Table 1 and Table 2 shows the reaction of six banking stocks to the effect of demonetization, The AR was negative initially and increased randomly between-10 to+10 times for selected banking stocks. The CAR show gradual increasing for the Bank of Baroda, HDFC Bank, Canara bank, SBI and IDFC .While the CAR growth for the Kotak Bank, IndusInd Bank and Axis Bank and Yes Bank show a continuous negative return. The AR for the Event time-0, Kotak Bank and Bank of Baroda has given a positive return. Compare to that of Indus Ind Bank, Axis Bank, Yes Bank .The highest return at event-0 was PNB with the returns of 8.7 %. At the event–0, the higher negative return was observed for AXIS Bank. The AR for the time interval other than the event-0, the the returns are not the same across all the Banking stocks. Interestingly. Bank of Baroda has less negative returns compare to the other banking stocks. while the CAR for rest of all the stock are event-10, PNB has highest positive returns of 37 % compare to other Banks where as AXIS Bank and Yes Bank has a value of-18.6 % and 18.2 % negative returns compare to all other stocks.

 

10. CONCLUSION:

Understanding stock market behavior around the economic event helps investors to beat the market and earn abnormal returns. This study aims to investigate whether investors of NSE Bank Nifty stocks gained significantly on the account of Demonetization. The results of the study indicate that there were significant asymmetrical abnormal returns across banking stocks. The average abnormal returns are positive to PNB with 37% compare to other Banks where as AXIS Bank and Yes Bank have a value of-18.6 % and 18.2 % negative returns compare to all other stocks.

 

11. REFERENCE:

1         A, N. K., and Sharmila. (2016). Demonetization and Its Impact on Indian Economy. International Journal of Humanities, Arts, Medicine and Science , 23-26.

2         Babu, S. H. (2016). Demonetization of Higher Denomination Banknotes in India and Growth of Mobile Wallet Business Transactions. Journal of Marketing and Consumer Research An International Peer-reviewed Journal , 30, 42-45.

3         D. J., and D. M. (n.d.). An Empirical Study on the Major Problems Faced Due To Demonetization by the Small Retailers in Erode City. IOSR Journal Of Humanities And Social , 18-20.

4         D. J., and D. M. (n.d.). An Empirical Study on the Major Problems Faced Due To Demonetization by the Small Retailers in Erode City. IOSR Journal Of Humanities And Social Science, 18-20.

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11      Sangeetha. (n.d.). Benefits of Demonetization: Rich and Poor. IOSR Journal Of Humanities And Social Science, 29-30.

12      Singh, D. P., and V. S. (2016). Impact of Demonetization on Indian Economy. International Journal of Science Technology and Management , 5 (12).

13      Singha, D. S. (2017). Demonetization and E-Banking in India. International Journal of New Technology and Research (IJNTR), 3 (1), 20-25.

14      V. K. (2011). Testing the Weak-form Efficiency Market Hypothesis: Evidence from Nigerian Stock Market. CBN Journal of Applied Statistics, 3 (1), 117-136.

15      V. M. (2016). Demonetization: A step towards modified India. International Journal of Commerce and Management Research, 2 (12), 35-36.

16      V. M. (2016). Demonetization: A step towards modified India. International Journal of Commerce and Management Research, 2 (12), 35-36.

 

 

 

Received on 24.03.2018          Modified on 21.04.2018

Accepted on 30.04.2018        ©AandV Publications All right reserved