The Impact of Policy Announcement on Stock Market Volatility: Evidence from Currency Demonetisation in India

Abstract

The aim of the current empirical paper is to investigate the impact of major political events and its impact on stock market with special reference to BSE Sensex, Nifty fifty and BSE100 index. History has exhibited that stock market plays a major role in any economy. Stock markets have been impacted by various macro and micro economic factors. Therefore, the main objective of this empirical paper is to investigate the pricing behaviour of the chosen benchmark indices (Sensex, Nifty and BSE100) with respect to a major political event in India (demonetisation of currency) and its implications on regulators, researchers and market participants. For the purpose of the study the data has been collected from 26-10-2015 to 30-11-2016. The collected data has been tested for stationarity by applying ADF test statistics. The event study methodology has been employed to determine the impact of demonetisation on India bench mark indices. In order to capture the historical volatility the standard deviation of the abnormal returns of the selected indices has been computed. GARCH (1,1) model has been employed to ascertain the existence of ARCH/GARCH effect in the indices. We found a significant impact of currency demonetisation on the chosen indices on the event day. Nobody knows the actual impact of demonetisation on the economy in the long run. Bulk of the studies and opinions of experts on the demonetisation is mixed. Some experts opine that the impact on the economy would be significant and adverse. However, another bunch of experts opine that the shock on the economy would be smaller, although no extensive macroeconomic assessment has been published.