Demonetization and Its Effects on BSESENSEX and Some Sectoral Indices: An Exploratory Econometric Analysis

Abstract

This study has carried out somepreliminary time series analyses to examine the impacts of demonetization which was carried outin India on 8 November 2016, on the well-known Indian stock index, BSESENSEX,and four major sectoral indices viz., BSE BANKEX,BSE Auto, BSE Reality and BSE Smallcap,using daily level time series data covering the period 1January 2016 to 31May2017. Apart from examining the stationarity/nonstationarity property and existence of structural breaks after demonetizationin these series, the paper has also studied the trend behavior and returns models for both the pre- and post-demonetization periods. This study has found that while there is more than one break in all the five series at their level values, there is only one structural break after demonetization.  It has also been found that the trend function for all the index series broadly gives support to this finding of one break after demonetization. Further, some changes have also been observed in the stationary models for the two sub-periods of pre- and post-demonetization for all but BSE Auto index. Finally, except for BSESENSEX to some extent, no change in the status of stationarity/nonstationarity in the pre- and post- demonetization periods has been found in the other series. 

Keywords

• -Perron multiple break points test,demonetization,stationarity,structural breaks

References

1. Bai, J., and P. Perron. 1998. “Estimating and Testing Linear Models with Multiple Structural Changes.” Econometrica66, no. 1: 47–78