Impact of demonetization on stock price volatility of public sector banks in India: special reference to Bse

International Journal of Management
Volume 11, Issue 03, March 2020, pp. 408-418. Article ID: IJM_11_03_043
Available online at />Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
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IMPACT OF DEMONETIZATION ON STOCK
PRICE VOLATILITY OF PUBLIC SECTOR
BANKS IN INDIA: SPECIAL REFERENCE TO
BSE
Kasilingam Lingaraja
Assistant Professor, Department of Business Administration
Thiagarajar College (Autonomous), Madurai, Tamil Nadu, India
Veluchamy Ramanujam
Associate Professor
Bharathiar School of Management and Entrepreneur Development (BSMED),
Bharathiar University, Coimbatore, Tamil Nadu, India
Lakshmanan Eswaran
Assistant Professor, Department of Commerce
Thiagarajar College (Autonomous), Madurai, Tamil Nadu, India
Thangaraj Viswanathan
Assitant Professor, Symbiosis Institute of Business Management,
Bangaluru, Karnataka, India
Chellaswamy Dhayanand
Assistant Professor, Department of Extension and Career Guidance
Bharathiar University, Coimbatore, Tamil Nadu, India
ABSTRACT
This research paper investigates the impact of Demonetization on public sector
banks stock price volatility in BSE. The purpose of the above objective, this study used

the secondary daily closing stock price data of selected top five largest public sectors
banks in India in 2018, based on their market capitalization, for the period of two years,
after demonetarization i.e., from 01st January 2017 to 31st December, 2018. The
statistical tools and models such as descriptive statistics, ADF, GARCH (1,1) Model
and graphical price movement diagram were used for estimating the public sector banks
stock price movements and Volatility during the study period. It is found that all the
sample public sector banking stocks may not be benefited from demonetization impact.
Finally this study conclude that the stock prices of selected public sector banks initially,

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Kasilingam Lingaraja, Veluchamy Ramanujam, Lakshmanan Eswaran, Thangaraj Viswanathan and
Chellaswamy Dhayanand

the effect of demonetization announcement was seen for a short duration but slowly the
market recovered and bounced back to normal.
Keywords: Demonetization, Public Sector Banks, Descriptive Statistics, GARCH (1,
1) Model, Stock Price Volatility and Bombay Stock Exchange
JEL Classification: B23; E44; E51; E52; G21; K35
Cite this Article: Kasilingam Lingaraja, Veluchamy Ramanujam, Lakshmanan
Eswaran, Thangaraj Viswanathan and Chellaswamy Dhayanand, Impact of
Demonetization on Stock Price Volatility of Public Sector Banks in India: Special
Reference to BSE, International Journal of Management, 11 (3), 2020, pp. 408-418.
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1. INTRODUCTION
Demonetization is the act of stripping a currency unit of its status as legal tender.

Demonetisation is not the first time experience for India. Demonetisation was initiated for the
first time in pre-independence era in the 1946 when then British government decided to strip
currency notes of Rs.1,000 and Rs.10,000 from its status of legal tender (Taqi, M., et al., 2018).
India went for Demonetisation for the second time in the year 1978 to crack down black money
and counterfeited currency on the recommendation of Wanchoo Committee. However, the
process failed to achieve its object because the recommendation of the committee was in public
domain and it gave the tax evaders and money hoarders time to find solution even prior to
demonetisation. On 16th January 1978, Morarji Desai’s government passed the High
Demonetisation Bank Notes (Demonetisation) bills to withdraw Rs.1,000, Rs.5,000 and
Rs.10,000 which was later reintroduced in the year 1954 (Burse, 2018). India went for
demonetisation for the third time On 8 November 2016, India’s Prime Minister Narendra Modi
announced the Government of India’s decision to cancel the legal tender character of Rs.500
and Rs.1,000 banknotes with effect from 9 November 2016. He also announced the issuance of
new Rs.500 and Rs.2,000 banknotes in exchange for the old banknotes (Baswan, T., 2017).
Basically, Stock market is considered to be an independent animal and some policy changes
barely impact the indices and stock prices in the market. However, post demonetization, the
scenario was quite different in the stock market. Hence, this research is to investigate the impact
of demonetization on stock price movements of selected public sector banks in India.

1.2. Banking sector in India
Indian banks can be divided into public sector and private sector banks. In India has over 100
banks, with just a small number of 27 of them being public sector banks, it is the public sector
banks that have a major stake in the economy of the country. Among the 27 public sector banks
five Banks namely state bank of India, Bank of Baroda, Punjab National Bank, Central Bank
of India and IDBI Bank in India have been able to prove their strengths over time. They are
banks that are well spread across the country and even beyond, through their well-established
branches in all over India.
1.2.1. Highlights of top five public sector banks in India.
1.2.1.1. State Bank of India
It is inarguably the king of the Indian banks. Incorporated in 1955, SBI brags of at least 13,000

branches across India together with at least 190 foreign offices across the continents. It has its
headquarters in Mumbai. The banks are popular for its technologically advanced products such
as the recently launched SBI in Touch cards that give its users the effective ability to execute

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Impact of Demonetization on Stock Price Volatility of Public Sector Banks in India: Special Reference
to BSE

payment by just touching or waving their cards near contactless readers. Other than banking
products, the bank is also known for offering other services and products mainly in the fields
of capital markets, General Insurance and Life Insurance via its subsidiaries.
1.2.1.2. Bank of Baroda
It is the second biggest banks not only among the public sector banking but in the entire banking
industry. It was incorporated in 1908 and is headquartered in Vadodara (Previously known as
Baroda), in Gujarat. The bank has widely been spread across the country and beyond, having
in the excess of 5,000 branches across India and about 100 others in at least 25 foreign countries.
A leading institution in the provision of banking and financial services, Bank of Baroda is a
winner of a number of major awards such as the Excellence in Banking (PSU Sector) Award.
1.2.1.3. Punjab National Bank
It is the oldest of the top three public sector banks having been founded in 1894. The bank has
a strong presence in India with at least 6,000 branches spread across the domestic market with
another 5 overseas branches. Its headquarters is in New Delhi and is currently supported by a
workforce of at least 62,000 employees. Punjab National Bank is yet another award winner,
having won the Winner of Golden Peacock Award among others. The bank returns to the
society by performing Corporate Social Responsibilities such as organizing tree planting

sessions, blood donation camps, and medical camps.
1.2.14. The Central Bank of India
It is one of the oldest and one of the topmost public sector banks in the country founded in 1911.
Its headquarters are in Mumbai with at least other 4,000 branches having been spread across
the country. The bank was among the first to launch credit cards in the country and is served
by a workforce of at least 40,000 workers. Upon its establishment, the bank became the first
commercial bank in India that was not only wholly owned but also managed by Indians.
1.2.1.5. The IDBI Bank
It was incorporated in 1964. It has its headquarters in Mumbai and is served by a workforce of
about 18,000 employees. Through time, the IDBI bank has been able to spread across the
country, having about 1,800 branches and 3350 ATMs. Its operations are driven by a cutting
edge in Banking IT platform. Under its belt are personalized financial and banking solutions to
the corporate as well as retail banking arena through this large network. IDBI already has a
formidable name but is still steadily scaling higher heights.
However, it is also argued among economists, policy makers and researchers that the affect
is transient and will recover once normalcy is attained. The Banks stock price movements in
the stock market would be a good indicator to evaluate the impact of demonetization on the
performance of various stocks in public sector banks listed on a recognized stock exchange like
BSE. Hence an attempt has been made in this research to analyse the Impact of
Demonetization on Stock Price Volatility of Public Sector Banks in India: Special
Reference to BSE.

2. REVIEW OF LITERATURE
An attempt has been made to review the earlier research works undertaken in the area of
Demonetization, market efficiency, stock price movements and volatility among public sector
bans to understand research gaps, tools used and findings of earlier studies.
Jokipii, T and Monnin, P (2013), investigated the relationship between the degree of
banking sector stability and the subsequent evolution of real output growth and inflation. This

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Kasilingam Lingaraja, Veluchamy Ramanujam, Lakshmanan Eswaran, Thangaraj Viswanathan and
Chellaswamy Dhayanand

study applied a panel VAR methodology for a sample of 18 OECD countries. It is found that
banking sector stability (instability) results in a significant underestimation (overestimation) of
GDP growth in the subsequent quarters. Choudhry, T and Jayasekera, R. (2014), empirically
investigated the return, volatility and leverage spillover effects between banking industrial
stock markets of the major economies (ME) (Germany, UK and US) and the smaller stressed
European Union countries (SE), (Italy, Ireland, Greece, Spain and Portugal) from 2002 to 2014.
It was suggested that the existence of exploitable trading strategies and has important
implications to investors in the areas of option pricing, portfolio optimization and risk
management. Lingaraja et al. (2014) analyzed the market efficiency and the performance
among the emerging stock markets in Asia. It was found that the four emerging Asian countries
indices, namely, India, Indonesia, Malaysia and Philippines recorded random distribution at
95% confidence level and these markets were highly efficient during the study period. Birău,
R et al., 2015 investigated the volatility patterns of the S&P Bombay Stock Exchange (BSE)
BANKEX index which is the Indian banking sector index. It is to be found that the stock
fluctuations are abnormal and highly volatile since the evidence presence in year 2004 for down
effect shocks and 2009 for positive shocks. ACF and PACF shows less degree of negative
patterns and more positive patterns and presence of AR effect in series. Chellasamy and Anu’s
(2017) study aimed to analyse the impact of demonetization on the Sectoral Indices of the NSE.
Ordinary least square was used for the study, and the data consisted of 47 observations, 25
trading days before the event and 22 trading days after the event. The result showed that most
sectors exhibited negative values, and the public-sector banking segment, pharma, energy and
IT recorded a rise in returns. Sunil and Shenoy’s (2017) study examines the impact of

demonetization on stock prices of selected sectors. Five sectors and top five companies of each
of these sectors and the closing prices 2 months prior to and 4 months post-demonetization were
considered for the study. The data were collected from the BSE. The returns were calculated
using the holding period return (HPR), buy-and-hold abnormal return (BHAR) and expected
returns were calculated using the Capital Asset Pricing Model. The study concluded that the
impact on the market was temporary but overall it has not affected the markets to the extent
expected. Dungey, M et al., 2018, analyzed the transmission of shocks between global banking,
domestic banking and the non-financial sector for eleven Eurozone countries. It is found that
the shocks originated in the non-financial sector trigger contagious effects for both the domestic
banking sector and, to a lesser extent global banking, thereby acting as a source of fragility for
the financial sector during crisis periods. Danisman, G. O., and Demirel, P (2019), examined
the impact of market power and bank regulatory variables, such as capital stringency,
restrictions in activities and the power of supervisory agencies, on bank stability. It considered
various dimensions of bank risk exposures. It is interesting to note that the capital requirements
are the strongest regulatory tool for decreasing bank risk, and they decrease bank risk more for
banks with more market power.
It is to be noted that the above cited literature covered the financial crisis, banking
regulation, transmission of shocks and demonetarization impact on price volatility of different
sectors and countries stock market (prices and indices). But no detailed research focused on
demonietaization and its impact on public sector banks stock price volatility and risk. Hence an
attempt has been made in this study to examine the Impact of Demonetization on Stock Price
Volatility of Public Sector Banks in India: Special Reference to BSE.

3. STATEMENT OF THE PROBLEM
As stated earlier, there are limited number of studies have investigated on this topic in the past.
But no comprehensive literature was focused on demonetization and stock price performance
of public sector banks. Therefore, it impels the author to do research on the topic and thus
contribute to the sparse literature. This study intends to examine the impact of demonetization

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Impact of Demonetization on Stock Price Volatility of Public Sector Banks in India: Special Reference
to BSE

on the stock price performance of top five public sector banks in India. In order to measure the
impact of demonetization on stock price of BSE top five public sector banks has been used as
a good indicator of the stock market. The BSE is the oldest stock exchange in Asia and is the
tenth largest stock exchange in the world Therefore, for the purpose of the study, BSE has been
chosen.

4. OBJECTIVES OF THE STUDY
To investigate the impact of demonetization on stock price volatility of selected Public Sector
Banks in India.

5. HYPOTHESES OF THE STUDY
The present study were formulated and tested the following null hypotheses to accomplish the
objective of the study.
NH1:
There is no normal distribution among the stock price of selected public sector
banks after demonetization period.
NH2:
There is no stationarity among the stock price of selected public sector banks
after demonetization period.
NH3:
There is no volatility among the stock price of selected public sector banks after
demonetization period.

6. RESEARCH METHODOLOGY
6.1. Period of Study
To examine the impact of demonetization on stock price volatility of selected Public Sector
Banks in India, the study covered a period of two year after demonetization i.e., from 1st
January, 2017 to 31st December, 2018.

6.2. Sample Design
The study focused on top five public sector banks in India i.e., state bank of India, Bank of
Baroda, Punjab National Bank, Central Bank of India and IDBI Bank ltd were as sample based
on market capitalization.

6.3. Data variables and Sources
The data of daily closing prices of five public sector banks i.e., state bank of India, Bank of
Baroda, Punjab National Bank, Central Bank of India and IDBI Bank ltd were collected from
the official website of Bombay Stock Exchange website (www.bseindia.com). The other
relevant data were collected from reputed books, Journals and Articles. The daily closing stock
price were transformed by taking natural logarithm of the raw data.

6.4. Tools Used for Analysis
The following tools were used for the purpose of analysis and testing the null Hypotheses of
this study
• Descriptive Statistics (to find out the normal distribution of sample banks)
• ADF Test (to experiment the stationarity among the Sample banks)
• GARCH (1,1) Model (to investigate the Volatility among the Sample), and
• Graphs (to express the sample banks stock price movements)

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Kasilingam Lingaraja, Veluchamy Ramanujam, Lakshmanan Eswaran, Thangaraj Viswanathan and
Chellaswamy Dhayanand

7. LIMITATIONS OF THE STUDY
The following were the select limitations of the study
• This study considered only five public sector banks not in the whole banks in India.
• As the study was based on secondary data i.e., daily closing stock price of sample
banks from BSE, it is beset with certain limitations which are bound to arise dealing
exclusively with secondary data.
• This research work was limited to two year period (after demonetization) from 01st
January, 2017 to 31st December, 2018.
• All the limitations, associated with statistical tools used, are applicable to this study
also.

8. ECONOMETRIC ANALYSIS AND EMPIRICAL RESULTS
For the purpose of analyse the stock price volatility by using Descriptive Statistics, Unit Root
Test (ADF), GARCH and Graph.

8.1. Descriptive Statistics for the Selected Sample Public Sector Banks
Table 1 The Results of Descriptive Statistics for the Selected Sample Public Sector Banks during the
Study Period from 01st January, 2017 to 31st December, 2018
Sample Banks
Statistics
Mean
Median
Maximum
Minimum

Std. Dev.
Skewness
Kurtosis
Jarque-Bera
Probability
Observations

SBI

Bank of
Baroda

PNB

Central Bank of
India

IDBI Bank
Ltd

0.00062
-0.00036
0.27584
-0.05735
0.02142
4.47547
57.42210
62612.13
0
494

-0.00009
-0.00060
0.31471
-0.16025
0.02792
2.58688
37.21684
24649.77
0
494

-0.00023
0.00069
0.46198
-0.12151
0.03372
4.87744
73.89132
105401.8
0
494

-0.00129
-0.00308
0.15594
-0.19955
0.02841
-0.18665
14.59763

2771.429
0
494

0.00060
0.00000
0.09274
-0.16718
0.02662
-0.39308
7.65517
458.7745
0
494

Source: and Computed using E-Views 7 Version.
The results of descriptive statistics for the selected sample public sector banks during the
study period from 01-01-2017 to 31-12-2018 are shown in Table - 1. It is clear from the above
Table that during the study period, the stock price of State Bank of India earned high mean
value of 0.00062, followed by IDBI bank ltd (0.00060). In terms of stock price unpredictability
as measured by the standard deviation of daily returns, only one sample bank namely Punjab
National Bank assumed the highest risk value (0.03372), followed by Central bank of India
(0.02841), Bank of Baroda (0.02792), IDBI bank ltd (0.02662), and State Bank of India
(0.02142). This indicates the fact that there was high risk (in the order of stocks, namely, PNB,
Central bank of India, Bank of Baroda, IDBI Bank Ltd and SBI). It is significant to note that
high degree of risk was useful for speculators but the investors may study the market risk and
carefully take investment decision. The analysis of skewness shows that values for all sample
banks stock price, except SBI, Bank of Baroda and PNB, were negative. It is significant to note
from the above Table that all sample banks stock values of kurtosis larger than three or high

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Impact of Demonetization on Stock Price Volatility of Public Sector Banks in India: Special Reference
to BSE

level fat-tails, which make it Leptokurtic. Besides, the Jarque-Bera (JB) values clearly implied
that all the sample were normally distributed. In other words, all the sample banks stock prices
were less volatile during the study period. In short, the distribution of return data for all the
sample banks stock price data was normal. Hence the Null Hypothesis (NH1), there is no
normal distribution among the stock price of selected public sector banks after demonetization
period, was rejected.

8.2. Augmented Dickey Fuller (ADF) Test for the Selected Sample Public Sector
Banks
Table 2 The Results of ADF Test for the Selected Sample Public Sector Banks during the Study
Period from 01st January, 2017 to 31st December, 2018
Unit Root Test
Statistics

ADF TEST
Statistical
Value

PValue

Critical

Value

Durbin
Watson
Test
Statistic

R-squared

1.999929

0.498012

1.999881

0.494139

1.988383

0.444583

2.01597

0.413324

1.985245

0.455162

Top Five Public Sector Banks in India

Sample
State Bank of
India
Bank of
Baroda
Punjab
National Bank
Central Bank
of India
IDBI Bank
Ltd

1%
5%
10%
1%
5%
10%
1%
5%
10%
1%
5%
10%
1%
5%
10%

-22.0706

-22.0706
-22.0706
-21.9003
-21.9003
-21.9003
-19.8247
-19.8247
-19.8247
-18.5989
-18.5989
-18.5989
-20.253
-20.253
-20.253

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

-3.44339
-2.86718
-2.56984
-3.44339
-2.86718
-2.56984
-3.44339
-2.86718
-2.56984
-3.44339
-2.86718
-2.56984
-3.44339
-2.86718
-2.56984

Source: and Computed using E-Views 7 Version.
The results of Unit Root Tests (Augmented Dickey Fuller - ADF test), for the selected
sample public sector banks during the study period from 01-01-2017 to 31-12-2018, are
presented in Table – 2. It is to be noted that the values of test critical for the sample bank closing
prices were -3.44339, -2.86718 and -2.56984, at the significant levels of 1%, 5% and 10%
respectively. The probability values for the closing stock price of sample banks were zero
during the study period. The R-Square statistics and Durbin Watson test statistics, for all the
sample, were also nearly 0.50 and 2.00 respectively. It is to be noted that the test statistical (tstatistic) values for all sample stock price of banks were less than the test critical values at 1%,
5% and 10% levels of significance. The results of ADF Test, as given at the above Table,
indicate that the returns data of five sample banks attained stationarity during the study period.
Hence, the null hypothesis (NH02), namely, There is no stationarity among the stock price of
selected public sector banks after demonetization period, was rejected.

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Kasilingam Lingaraja, Veluchamy Ramanujam, Lakshmanan Eswaran, Thangaraj Viswanathan and
Chellaswamy Dhayanand

8.3. GARCH (1,1) Model for the Selected Sample Public Sector Banks
Table 3The Results of GARCH (1,1) Model for Selected Sample Public Sector Banks during the
Study Period from 01st January, 2017 to 31st December, 2018
Sample Public Sector
Banks
State Bank of India
Bank of Baroda
Punjab National Bank
Central Bank of India
IDBI Bank Ltd

C

α

β

α+β

P Value

0.000100
0.000184
0.000481
0.000121
0.000009

0.080960
0.064659
0.074189
0.063061
0.045033

0.914460
0.922413
0.789811
0.919408
0.932470

0.995420
0.987072
0.864000
0.982469
0.977503

0
0
0
0
0

Source: and Computed using E-Views 7 Version.
Table-3 shows the results of volatility, using GARCH (1.1) model, for daily (closing value)
returns of selected sample public sector banks during the study period from 01-01-2017 to 3112-2018. From the Table, it is clearly observed that value of the probability (P-Value) was zero
at 99% confidence level. According to the analysis of GARCH Model, the α+ β values of all
the five sample public sector bank were close to one. This indicates the fact that the returns
data, for all the closing stock price of sample banks, were highly volatile, during the study
period. Thus the null hypothesis (NH03), there is no volatility among the stock price of selected
public sector banks after demonetization period, was rejected.
Chart 1 Results of Volatility (α+β) for Sample Public Sector Banks during the Study Period from 01st
January, 2017 to 31st December, 2018

Source: Data taken from Table-3 and Computed using MS office Excel – 2007
The results of volatility (both α+β value), of all the five sample banks, during the study
period from 01st January, 2017 to 31st December, 2018, are shown in Chart – 1. The Chart
clearly explains the high rate of volatility in sample Banks. The values of both risk and return
(α+ β) were close to one and the Chart represents both high and low volatility of stock price
return of banks. The stock price of SBI earned high market volatility, with a value of 0.995420,
followed by Bank of Baroda, with a value of 0.987072. The remaining three sample banks,
namely, Central Bank of India (0.982469), IDBI bank ltd (0.977503) and Punjab National bank
(0.864000) recorded lower volatility during the study period.

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Impact of Demonetization on Stock Price Volatility of Public Sector Banks in India: Special Reference
to BSE
Graph 1 Graphical Expression for Price Movements (Closing Prices) of Sample Public Sector Banks

during the Study Period from 01st January, 2017 to 31st December, 2018
SBI

Bank of Baroda

340

200

320

180

300

160

280

140

260

120

240

100

220

80
I

II

III
2017

IV

I

II

III
2018

IV

I

II

III
2017

PNB

IV

I

II

III
2018

IV

III
2018

IV

Central Bank of India

240

140

200

120
100

160
80
120
60

80

40

40

20
I

II

III
2017

IV

I

II

III
2018

IV

I

II

III

2017

IV

I

II

350

IDBI

300

90

250

80

200
150

70

100
50

60

0
I

II

III
2017

50

I

II

III
2017

IV

I

II

III
2018

I

II

III

IV

2018
SBI
PNB
IDBI

40

IV

Bank of Baroda
Central Bank of India

IV

Source: and Computed using E-Views 7 Version.
The graphical exposition shows how far during the effect of time different stock prices tend
to reflect each other in tune with the public sector banks daily stock price movements after
demonetization period from January 01, 2017 to December 31, 2018 ( individual & grouped)
price ups and downs are shown in Graph - 1. Besides, the graphical representation is useful to
all types of investors who could easily identify their best investment in the public sector banks.

9. CONCLUSION
The study examined the impact of the demonetization announcement on Stock Price of Banks
in India with special reference to BSE listed public sector banks. The output of all statistical
data analysis of this research such as descriptive statistics, unit root test and GARCH Model
shows that there is no significant impact of demonetization on the stock price of selected public

sector banks during the study period of after demonetization from 01st January, 2017 to 31st
December, 2018. However, the Banking sector will be the biggest beneficiary of
demonetization. Banks are flush with the money. The demonetization is the beginning of digital
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Kasilingam Lingaraja, Veluchamy Ramanujam, Lakshmanan Eswaran, Thangaraj Viswanathan and
Chellaswamy Dhayanand

payment era. The government will take all steps to make India a cashless economy. It will also
positively impact the operational efficiency of the banks. It is found that all the sample public
sector banking stocks may not be benefited from demonetization impact. It is to be noted that
the Graph -1 was clearly explained that initially, the effect of demonetization announcement
was seen for a short duration but slowly the market recovered and bounced back to normal. The
findings of the study are reliable because it uses long-term data to study the impact of
demonetization. Therefore, this study did not find any significant impact of after
demonetization announcement on public sector banks stock prices on BSE Stock Market.

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