




































Indian Journal of Finance and Banking 

 Vol. 8, No. 1; 2021 

                                       ISSN 2574-6081   E-ISSN 2574-609X 

Published by CRIBFB, USA 

 

32 

IMPACT OF DEMONETIZATION ON INDIAN BANKING STOCKS: 

AN EVENT STUDY METHODOLOGY 
 

 

Dr. Rajesh Raut 

Assistant Professor 

Modern Institute of Business Management, Pune, India 

E-mail: dr.rwraut@gmail.com 

 

Dr. Harsha Thorve 

Associate Professor  

Modern Institute of Business Management, Pune, India 

E-mail: harsha.mibm@gmail.com 

 

Dr. Shrawan Owhal 

Professor  

Modern Institute of Business Management, Pune, India 

E-mail: shrawanowhal.mibm@gmail.com 
 

 
Received: August 30, 2021       Accepted: September 19, 2021       Online Published: October 25, 2021  

 

DOI: 10.46281/ijfb.v8i1.1402            URL: https://doi.org/10.46281/ijfb.v8i1.1402  

 

 

ABSTRACT 

Demonetization is the withdrawal of a particular form of currency from circulation. In other words, the 

notes lose their value as a currency. It is an instrument that is used to manage various economic 

problems such as inflation, corruption, tax evasion, etc. The Indian government on November 8, 2016, 

decided to demonetize high denomination currencies. This announcement had an impact on several 

sectors of the Indian economy. This study is an investigation to measure the impact of demonetization 

announcements on the Indian banking sector. This study employs cumulative abnormal return (CAR) 

and an event study methodology to measure the impact of the decision on the selected banking stocks. 

The study shows that demonetization had a significant impact on the stock prices of selected banks. The 

findings of the study suggest that on the event day, none of the selected stock has shown significant 

positive abnormal returns. Further on the event day and followed by the event day positive significant 

ARR is observed indicating demonetization had a significant impact on the stock prices of selected 

banks. Also, CAR on the event day is not equal to zero indicating the Indian stock market was not efficient 

for demonetization announcement. 

 

Keywords: Demonetization, Indian Banking Sector, Cumulative Abnormal Return, Event Study 

Methodology. 

 

JEL Classification Codes: G10, G14, G18, G21. 

 

INTRODUCTION 

Demonetization is the withdrawal of a particular form of currency from circulation. Notes of a particular 

denomination cease to be legal tender. In other words, the notes lose their value as a currency. The 

mailto:dr.rwraut@gmail.com
mailto:harsha.mibm@gmail.com
mailto:shrawanowhal.mibm@gmail.com
https://doi.org/10.46281/ijfb.v8i1.1402


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demonetization is usually done to tackle black money, corruption, to curb fake currency and to curtail 

shadow economy. It is expected that demonetization will also bring down the use of illicit money for 

funding smuggling and terrorism.  Countries across the globe have used demonetization at some or the 

other point to control inflation and to boost the economy. On 8th November 2016, the Government of 

India announced Demonetization of INR 500 and INR 1000 banknotes. It was announced in an 

unscheduled live telecast addressed by Prime Minister Mr. Narendra Modi. The demonetization may 

have a different effect on the various industries. This depends on the demand and supply of hard cash in 

the respective sector. Industries in the informal sector where hard cash play significant role had affected 

more than the formal sector. The impact of demonetization can be studied from the financial statements 

of companies from the various sector. Comparative analysis of sales, profit, etc. over a period of time 

will help to measure the impact. As demonetization affected various sectors this will be reflected in the 

share price of companies within those sectors. 

Demonetization was an unexpected public announcement. Following the day of the 

announcement, i.e. on 9th November 2016, the NSE’s Nifty dropped by 541.30 points i.e. 6.33 % and 

BSE’s Sensex by 1688 points i.e. 6.12 %. The Indian currency was down by 23 paise and was trading 

at INR 66.85 per US $. This announcement can be considered under efficient market hypothesis, which 

states that the stock market is a good indicator of sentiments of investors and it discounts and reflects 

the information quickly. It is interesting to know the reaction of Indian Stock market to demonetization. 

The present study is an attempt to investigate the impact of demonetization on the share price of the 

selected public sector and private sector banks.  

 

LITERATURE REVIEW 
Bharadwaj, Mohith, Pavithra, and Anaath (2017) studied the impact of demonetization on Indian stock 

market by using efficient market hypothesis. The study is based on the 16 companies listed on NSE 

belonging to four different sectors viz. media, energy, private banking and realty. The observations are 

based on a period of five years from 2012 to 2016 before demonetization and 5 months November 2016 

to March 2017 after demonetization. A Sharpe index model is used to construct an optimum portfolio. 

The risk and return values are calculated to evaluate the stock. The results reveal that there was a 

significant impact of demonetization on Indian stock market along with some fluctuations. 

Chauhan and Kaushik (2017) studied the impact of demonetization on Indian stock market. The 

study observed the price movement of the stocks during the pre and post announcement of 

demonetization for the period of 30th October 2016 to 21st November 2016. The event study 

methodology used to analyze the impact of demonetization the share price of BSE 100 companies. The 

study used OLS Market Model, Market-Adjusted Return Model and Mean-Adjusted Return Model and 

checked the significance of AAR and CAAR for each model using t statistics. The result states that there 

is no significant impact of demonetization on the Indian stock market prices. 

Tiwari and Anjum (2017) researched the opinion of management students, faculties and bankers 

to analyses the impact of demonetization. The study is based on the survey conducted using a 

questionnaire in Pune city of Maharashtra state. The results of the study reveal that the respondent 

considered no significant impact of demonetization on terrorism. It is observed that the respondents were 

moderately satisfied with the effect of demonetization on reducing fake currency. Respondents agreed 

that demonetization helped in increasing tax compliance. It is also observed that the respondent had a 

neutral opinion regarding the planning and execution of demonetization. 

Kumar (2018) studied the impact of demonetization on sectoral indices in the Indian stock 

market after one year of announcement. The study used paired sample t-test to understand the impact of 

demonetization on the indices of various sectors. The study noted an increase in the index value of few 

sectors like metal, financial services and oil and gas while there was a decrease in the index value of 

sectors consisting of the automobile, FMCG and pharma. 

Lodha, Kumawat, and Bapna (2018) studied whether or not Indian stock market overreacted to 

the demonetization news. The study is based on the event study methodology consisting of an event 

window of 21 days (+10, 0, -10) and an estimation window of 81 days. The study used a market model 



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34  

to check the significance of AAR using t statistics. The result of the study shows that demonetization 

has affected different indices differently. Financial services and banks yielded positive AR and CAR, 

while real estate, IT, Auto, and media produced negative ARs and CARs. 

 There are very few studies conducted on the demonetization. Furthermore from the literature, it 

is observed that most of the studies are related to the impact of demonetization on the stock market and 

sectoral indices. Few studies are based on understanding the opinions of various stakeholders of the 

economy on demonetization. In the literature, the impact of demonetization on the share price of banking 

companies remain relatively unexplored. This paper attempts to study the impact of demonetization on 

the share price of banking sector companies with the following objectives: 

 

OBJECTIVES 

 To study the effects of demonetization on return on selected stocks of banks. 

 To compare changes in stock prices of selected public sector banks and private sector banks over an 

event window. 

 

HYPOTHESIS OF THE STUDY 

 H0: Demonetization announcement has no significant impact on stock prices of selected banks. 

 H1: Demonetization announcement has a significant impact on stock prices of selected banks 

 

DATA SOURCE AND SAMPLING 

To evaluate the objectives of the study, secondary data were used (BSE Limited, 2021). Top 5 public 

sector banks (PSBs) and top 5 private sector banks (PVSBs) based on total assets (as on dated 9 

September 2019) are considered for the study. 

 

METHOD 

 The event study methodology is used to measure the market reaction to demonetization news. 

Demonetization is announced on the evening of 8th November 2016 (after trading hours), therefore 

9th November is considered as event day (t0). 7 trading days before and after demonetization and 

event day is considered as event window (30th October to 21st November 2016). 100 days (3rd June 

to 28th October 2016.) estimation window is considered (eventstudytools).  

 Event study methods quantify the economic impact of an event on abnormal returns. Market model 

(Equation 1) is used to calculate the abnormal return. 

𝐴𝑅𝑖,𝑡 = 𝑅𝑖,𝑡 − (𝛼𝑖 + 𝛽𝑖𝑅m,𝑡)                                    (1) 

 

ARi,t= Abnormal Return, 

Ri,t= Actual Return 

Rm= Market return (BSE 200 is considered as a market benchmark.) 

αi =The excess return of an investment relative to the return of a benchmark index 

βi =A stock's volatility in relation to the market 

Following equations are used to calculate average abnormal return and cumulative average abnormal 

return. 

𝐴𝑅𝑅 =
1

𝑛
∑ 𝐴𝑅𝑖,𝑡
𝑁
𝑖=1                                                       (2) 

𝐶𝐴𝑅(𝑡1, 𝑡2) = ∑ 𝐴𝑅𝑖,𝑡
𝑡2
𝑡=𝑡1                                            (3) 

 The excess return of an investment relative to the return of a benchmark index (α), a stock's volatility 

in relation to the market (β) and standard error are computed using the market return of estimation 

window.  



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35  

 t statistics (Equation 4)is used to measure the impact of demonetization event on the share price.  

t statistics=AAR (for each day of event window)/ Standard error (of estimation window)   (4) 

 

DATA ANALYSIS 

Descriptive Statistics 

Following table (Table1) shows values of stock's volatility in relation to the market (β), the excess return 

of an investment relative to the return of a benchmark index (α) and standard error using regression.  

Table 1. Statistical Measures 

 

Bank Name Beta Alpha Standard Error 

SBI 0.2273 0.0028 0.0177 

PNB 0.5587 0.0070 0.0272 

BOB 0.2814 0.0014 0.0225 

CB 0.3275 0.0050 0.0236 

BOI 0.5340 0.0035 0.0244 

HDFC 0.0885 0.0008 0.0089 

ICICI -0.2222 0.0014 0.0212 

AXIS -0.0743 -0.0006 0.0187 

YES 0.1712 0.0022 0.0173 

KOTAK 0.1067 0.0010 0.0113 

 

Beta is used to measure the systematic risk of a stock in relation to market risk. Beta for each of 

the banking stock is calculated considering BSE 200 as a benchmark. All the banking stocks have 

positive beta except ICICI Bank and Axis bank. As the beta of all the selected banking stocks is less 

than 1, this indicates that stocks are less volatile than the benchmark. PNB has the highest beta of 0.5587, 

while HDFC has the lowest beta of 0.0885.  A negative beta of -0.0743 and -0.2222 is observed for Axis 

bank and ICICI bank respectively, indicating movement of stock in the opposite direction from the 

benchmark. From the beta values, it can be inferred that stocks of public sector banks are riskier than 

stocks of private sector banks. 

The alpha value indicates the performance of a stock in comparison with the market. The positive 

value of alpha indicates that stock is outperforming the market. All the stocks have positive values except 

for Axis bank. The highest value of 0.007 is recorded for Punjab National Bank, while the lowest value 

of 0.001is recorded for Kotak Mahindra bank. Overall stocks of public sector banks have a better value 

of alpha than stocks of private sector banks. 

Standard error value represents the sample. A lower value of standard error indicates the 

accuracy of the sample. HDFC Bank has the lowest standard error of 0.0089, while Punjab National 

Bank has the highest standard error of 0.072. From the values of standard error, it can be concluded that 

the sample is fair and it is representing the population accurately. 

Abnormal Return Analysis 

In this section abnormal return of each stock for each day during the event window is analyzed. Table 2 

presents the Abnormal Return Analysis and t- statistics of Public sector Banks and Private Sector Banks 

for event window i.e. for a pre-event period (-7 to -1) and post-event period (7 to 1).  

 



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36  

Table 2. Abnormal Return Analysis of Public sector Banks for the event window 

 
Day SBI PNB BOB CB BOI 

AR t -

statistic

s 

AR t -

statistics 

AR t -

statistics 

AR t –

statistics 

AR t -

statistic

s 

-7 -0.50% -0.28 -0.94% -0.35 -0.45% -0.20 -0.72% -0.31 -0.80% -0.33 

-6 -0.27% -0.15 -1.87% -0.69 -0.89% -0.39 -1.71% -0.73 -1.81% -0.74 

-5 -3.12% -1.76 -5.64% -2.07 -3.49% -1.55 -6.27% -2.66 -4.59% -1.88 

-4 -2.62% -1.48 -3.57% -1.31 -2.40% -1.07 -0.08% -0.03 -0.77% -0.32 

-3 -1.49% -0.84 -2.05% -0.75 -3.07% -1.37 -2.60% -1.10 -2.83% -1.16 

-2 3.97% 2.24 6.37% 2.34 4.03% 1.79 2.90% 1.23 2.10% 0.86 

-1 -0.07% -0.04 0.19% 0.07 0.80% 0.36 -0.94% -0.40 0.69% 0.28 

0 2.50% 1.41 0.47% 0.17 1.25% 0.56 0.63% 0.27 0.33% 0.13 

1 8.19% 4.62 11.30% 4.15 8.96% 3.98 6.31% 2.68 12.74

% 

5.22 

2 -3.38% -1.91 -3.06% -1.12 -2.63% -1.17 -3.35% -1.42 -2.08% -0.85 

3 1.45% 0.82 -1.86% -0.68 8.17% 3.63 0.59% 0.25 0.18% 0.08 

4 -0.82% -0.46 -4.94% -1.81 -0.99% -0.44 0.36% 0.15 -2.53% -1.04 

5 -0.08% -0.04 -1.42% -0.52 0.73% 0.33 0.75% 0.32 -1.42% -0.58 

6 -1.03% -0.58 0.54% 0.20 0.95% 0.42 0.19% 0.08 0.84% 0.34 

7 -6.59% -3.72 -9.01% -3.31 -8.53% -3.79 -6.12% -2.60 -3.40% -1.39 

Day HDFC ICICI AXIS YES KOTAK 

AR t -

statistic

s 

AR t -

statistics 

AR t -

statistics 

AR t -

statistics 

AR t -

statistic

s 

-7 -0.60% -0.67 -0.03% -0.02 0.40% 0.22 -0.70% -0.41 0.32% 0.28 

-6 0.34% 0.39 -0.61% -0.28 -2.38% -1.28 -1.78% -1.03 -1.95% -1.72 

-5 -1.19% -1.34 -1.37% -0.65 0.16% 0.08 -3.37% -1.95 -0.43% -0.38 

-4 0.74% 0.83 -0.86% -0.40 0.07% 0.04 -0.56% -0.32 0.12% 0.11 

-3 -1.12% -1.26 -0.15% -0.07 0.63% 0.34 -1.16% -0.67 -0.87% -0.77 

-2 0.49% 0.55 3.04% 1.43 1.31% 0.70 0.72% 0.42 0.24% 0.22 

-1 0.39% 0.43 1.23% 0.58 1.29% 0.69 1.45% 0.84 1.18% 1.04 

0 -0.31% -0.34 -0.71% -0.33 -0.53% -0.28 -0.64% -0.37 1.48% 1.30 

1 1.89% 2.11 3.69% 1.74 3.90% 2.09 5.69% 3.28 -0.54% -0.48 

2 -0.12% -0.13 -5.48% -2.58 -1.54% -0.82 -6.04% -3.49 -0.78% -0.68 

3 -1.73% -1.94 -2.82% -1.33 -3.73% -2.00 -4.99% -2.88 -

3.37% 

-2.97 

4 -1.04% -1.17 -1.15% -0.54 -1.33% -0.71 1.43% 0.82 -

2.63% 

-2.32 

5 -1.21% -1.35 0.36% 0.17 0.56% 0.30 -0.61% -0.35 0.79% 0.69 

6 -1.56% -1.75 -1.31% -0.61 -0.11% -0.06 0.20% 0.12 0.36% 0.31 

7 -1.09% -1.22 -1.46% -0.69 -1.61% -0.86 -5.78% -3.34 -2.17% -1.92 

*-t stats is significant at 5 % 

 

All the public sector banks reacted positively to the announcement of demonetization. This can 

be observed in a positive return on the event date. In the private sector, all banks except Kotak Mahindra 

bank reacted negatively to the event. It is interesting to note that all banking stocks except Kotak 



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37  

Mahindra Bank show a positive return on the (t+1) day. In the long run, most of the banks show a 

negative return. Also, none of the banks except SBI and PNB shows statistically significant positive 

abnormal return before the event. This approves that people were not aware of the news before its 

announcement and it was shocking news for everyone.  

 

Cumulative Abnormal Return Analysis 

This section analyses the cumulative abnormal returns of each security over a period of 15 days, i.e. 

within the event window to get an idea about the average behaviour of a particular stock. It can be 

observed from table 3 that pre-event window; CAR of all banks except ICICI Bank and Axis banks is 

negative. On demonetization day all PSBs has shown an increase in return for investors while all PVSBs 

except Kotak Mahindra bank shows a negative return. In the post-event window stocks of SBI and BOB 

earn positive returns while the stock of the rest of the banks earns negative returns. 

 

Table 3. Cumulative Abnormal Return Analysis 

 
Day SBI PNB BOB CB BOI 

-7 -0.50% -0.94% -0.45% -0.72% -0.80% 

-6 -0.78% -2.81% -1.34% -2.44% -2.61% 

-5 -3.89% -8.45% -4.83% -8.71% -7.20% 

-4 -6.51% -12.02% -7.23% -8.78% -7.97% 

-3 -8.00% -14.07% -10.30% -11.38% -10.80% 

-2 -4.03% -7.70% -6.28% -8.48% -8.70% 

-1 -4.10% -7.51% -5.48% -9.42% -8.01% 

0 -1.60% -7.04% -4.23% -8.79% -7.68% 

1 6.58% 4.26% 4.73% -2.48% 5.06% 

2 3.20% 1.20% 2.10% -5.83% 2.98% 

3 4.66% -0.66% 10.27% -5.24% 3.16% 

4 3.84% -5.60% 9.28% -4.88% 0.63% 

5 3.76% -7.02% 10.01% -4.12% -0.79% 

6 2.73% -6.48% 10.96% -3.93% 0.05% 

7 -3.87% -15.48% 2.43% -10.05% -3.35% 

Day HDFC ICICI AXIS YES KOTAK 

-7 -0.60% -0.03% 0.40% -0.70% 0.32% 

-6 -0.26% -0.64% -1.98% -2.48% -1.63% 

-5 -1.45% -2.01% -1.82% -5.85% -2.05% 

-4 -0.70% -2.87% -1.75% -6.41% -1.93% 

-3 -1.83% -3.02% -1.11% -7.57% -2.80% 

-2 -1.33% 0.01% 0.20% -6.85% -2.56% 

-1 -0.95% 1.25% 1.49% -5.40% -1.38% 

0 -1.25% 0.54% 0.96% -6.03% 0.09% 

1 0.63% 4.23% 4.86% -0.34% -0.45% 

2 0.52% -1.25% 3.33% -6.39% -1.22% 

3 -1.21% -4.06% -0.40% -11.38% -4.59% 

4 -2.26% -5.21% -1.73% -9.95% -7.22% 

5 -3.46% -4.86% -1.18% -10.56% -6.43% 

6 -5.03% -6.16% -1.29% -10.35% -6.08% 

7 -6.11% -7.62% -2.90% -16.13% -8.25% 



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Average Abnormal Return and Cumulative Average Abnormal Return Analysis 

To measure the impact of the event on the selected stock ARR and t statistics of day-wise ARR is 

calculated. From Table 4 it can be observed that the pre-announcement period there are two incidences 

of positive ARR on t-1 and t-2 day. After the announcement, there is one incidence of positive ARR on 

t+1 day followed by negative ARR indicating low confidence of investors in the banking stocks. Also 

on vent day, there is a positive ARR of 0.004 % which is significant at 5 %. From this null hypothesis 

is rejected and an alternate hypothesis is accepted. Demonetization announcement has a significant 

impact on the stock prices of selected banks.  

 

Table 4. Average ARR and t statistics 

 

Day AAR t stat 

-7 -0.004 -6.01* 

-6 -0.013 -19.28* 

-5 -0.029 -43.74* 

-4 -0.010 -14.79* 

-3 -0.015 -21.97* 

-2 0.025 37.57* 

-1 0.006 9.26* 

0 0.004 6.67* 

1 0.062 92.73* 

2 -0.028 -42.46* 

3 -0.008 -12.08* 

4 -0.014 -20.38* 

5 -0.002 -2.29* 

6 -0.001 -1.37 

7 -0.046 -68.3* 

*-t stats is significant at 5 % 

 

CONCLUSION 

This study is based on the impact of demonetization announcement on the selected stocks of the banking 

sector in India. This research is based on the standard event study methodology. The study observed that 

there is no significant difference in the abnormal returns before demonetization announcement 

indicating that there was no seepage of information, and therefore we can say that this only handful of 

people were aware of this event. On the event day, none of the selected stock has shown significant 

positive abnormal returns. Further on the event day and followed by the event day positive significant 

ARR is observed indicating demonetization had a significant impact on the stock prices of selected 

banks. Also, CAR on the event day is not equal to zero indicating the Indian stock market was not 

efficient for demonetization announcement. 

 

REFERENCES 

Bharadwaj, R., Mohith, S., Pavithra, S., & Anaath, A. (2017). Impact of demonetization on Indian stock 

market. International Journal of Management, 8(3), 75-82. 

 

BSE Limited. (2021). Retrieved from https://www.bseindia.com 

 

Chauhan, S., & Kaushik, N. (2017). Impact of Demonetization on Stock Market: Event Study 

Methodology. Indian Journal of Accounting, 127-132. 

https://www.bseindia.com/


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39  

eventstudytools. (n.d.). eventstudytools. Retrieved from https://www.eventstudytools.com 

 

Kumar, A. (2018). Demonetization Effect on Sectorial Indices with Special Reference to Indian Stock 

Market- An Empirical Analysis. International Research Journal of Management and 

Commerce, 5(4), 358-373. 

 

Lodha, S., Kumawat, E., & Bapna, C. (2018). Impact of Demonetization Announcement on Indian 

Stock Market: An Event Study. Nirnay The Journal of Decision Science, 4-16. 

 

Tiwari, R., & Anjum, B. (2017). Review of Demonetization in India. SaiBalaji International Journal 

of Management Sciences, 1. 

 

 

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