Dissertation/research method on the impact of Cryptocurrencies in the UAE

Number of words: 1830 (excluding bibliography)

CONTENTS

1. INTRODUCTION & BACKGROUND……………………………...3

2. RESEARCH QUESTION…………………………………………….3

3. RESEARCH AIM……………………………………………………..3

4. RESEARCH OBJECTIVES………………………………………….3

5. LITERATURE OVERVIEW…………………………………...…....4-5

6. THEORETICAL CONTEXT………………………………...……....6

7. BIBLIOGRPAHY……………………………………………………..7

Effect of demonetisation on the Indian Stock Market

1. INTRODUCTION & BACKGROUND

Demonetisation is defined as “the act of stripping a unit of currency of its status as legal tender”(Kumar, 2016). On 8th November 2016, the Prime Minister of India Narendra Modi announced the decision to demonetise the ₹500 and ₹1000 notes of the Mahatma Gandhi series from 9th November 2016, which comprised about 86% of the total currency in the country(Midthanpally, 2017). The reasons for this move, as given by the Prime Minister in a countrywide televised speech were, to get rid of the fake currency notes that were in wide circulation; to deal with the issue of ‘black money’ that have been sat upon by citizens unwilling to pay taxes on their earnings; to address the problem of terrorism and drug-trafficking that were funded using the counterfeit currency; and to deal with the decades-long dilemma of corruption(Dasgupta, 2016).

This move undertaken by the Prime Minister, had a significant impact on the citizens of India, who had to face many problems such as lack of cash liquidity, long queues outside ATM’s and banks for withdrawing and depositing money, business slowdown due to lower consumption etc(Uke, 2017). This impact was also transferred on to the Stock Market, which showed negative trends, again due to the loss of liquidity, and thus becomes the main area of study of this paper.

This research will be helpful for Indian citizens, businesses, government as well as citizens of other countries wishing to study the impact of demonetization. It will help current and future investors, as well as financial analysts to understand the reasons for the shift in the stock market as a result of demonetization, and assist the government in taking better actions with regards to monetary policy in the future.

Limitations of this research would be the inability to consider all sectoral indices of the BSE, the time constraints associated with this study, and the inability to evaluate the impact on more time-periods than those already selected.

2. RESEARCH QUESTION

Does demonetisation have a significant influence on the Indian Stock Market?

3. RESEARCH AIM

The main purpose of this research is to find out whether there is a significant immediate, short-term and medium-term impact on some of the sectoral indices of the BSE as a result of the sudden demonetisation of currency.

4. RESEARCH OBJECTIVES

· To identify and specify the immediate, short-term and medium-term periods and to gather required data based on the same.

· To apply event study methodology in order to determine the impact of demonetisation on certain sectoral indices of the Bombay Stock Exchange (BSE).

· To develop appropriate hypotheses and perform suitable statistical tests to arrive at a conclusion.

· To contribute to the existing literature about the share price volatility due to occurrence of important events.

5. LITERATURE OVERVIEW

5.1 Chellasamy, D. P. and M, A. K. (2017) ‘Impact of Demonetisation on Indian Stock Market: With Special Reference to Sectoral Indices in National Stock Exchange of India’:(Chellasamy and M, 2017)

The aim of the paper is to determine the impact demonetisation has on the sectoral indices of the NSE and thus the Indian Stock Market. The study used the Ordinary Least Squares(OLS) to arrive at a conclusion that removal of currency from circulation has a significant effect on the stock market, shown through a negative trend for average returns on most sectors. However, few sectors such as Pharma, Energy, IT and Public-Sector Banking displayed an increase in returns. The study only compares the short-term pre-event and post-event impact of demonetisation on the stock market, and hence does not give complete information on the long- term impact.

5.2 Pathak, M. R. and Patel, B. (2017) 'Impact of Demonetisation on Indian Stock Market' : (Pathak and Patel, 2017)

This study uses a qualitative approach to study the impact of demonetisation on the Indian Stock Market represented by the NSE, by comparing the stock prices at 10, 30 and 50 days before and after the event date. The result that was arrived at suggested that there was no significant effect of demonetisation on the stock market, shown through a high negative correlation for the short-term period (±10 and ±30 days) and zero correlation for the ± 50 days period. The authors did not make the use of any specific model in the paper, and thus has no theory to base it on.

5.3 Bantwa, A. (2017) 'A Study on Impact of Demonetization on Indian Stock Market and Selected Sectors of Indian Economy': (Bantwa, 2017)

Mr. Bantwa has examined the impact of demonetisation on the Indian Stock Market, represented by NIFTY and some sectoral indices, and the impact on the volatility over a short-term period (i.e) 30 days before and after the announcement date using a paired t-test as his research method. He concluded that demonetisation has a “statistically significant impact” on all the sectoral indices that were studied.

5.4 Dubey, N. D., Pandey, S. P. and Kumar, D. D. (2017) 'Demonetization Announcement Effect- A Case Study of Indian Stock Market':(Dubey et al., 2017)

The main aims of this study are to measure the effect demonetization has on the stock market returns and to assess the changes in quantum of investment due to the announcement using a short-term event study on the NSE S&P CNX NIFTY Index. The inference from the study is that demonetization has a substantial bearing on the stock market and that there has been a decrease in average turnover post the announcement.

5.5 Dash, P. S. D. and Bagha, P. (2017) ‘Impact of Demonetization on Stock Price Movements in Banking Sector of India’:(Dash and Bagha, 2017)

The objectives of the study are to determine the impact of demonetisation on the stock prices of the Banking Sector represented by the SENSEX, NIFTY and BANKEX indices on the NSE, as well as to examine whether stock prices of Public Sector Banks(PSUs) display random movements. This has been conducted through a Runs test, which concludes that the indices and banks show random movements, a small percentage of which could be attributed to Demonetisation, however the percentage is not significant and may require the inclusion of additional variables to explain the random movements.

5.6 Khanna, V. and Dharmapala, D. (2017) ‘Stock Market Reactions to India's 2016 Demonetization: Implications for Tax Evasion, Corruption, and Financial Constraints’: (Khanna and Dharmapala, 2017)

This paper studies the reaction of the Indian Stock Market (represented by the sectoral indices of the BSE) to Demonetisation, and its association with corruption, tax evasion and financial constraints, using event study methodology to assess the same. Findings of this study suggest that sectors that are more commonly associated with corruption and tax evasion (Real Estate, Agriculture) do not experience significantly different returns. However, sectors that are largely dependent on external finance for operations, show higher returns, signifying possible ease of financial restraints. However, a limitation of this paper is that it only shows the effect of demonetisation on stock prices of different sectors, without explaining its effect on the stock market as a whole.

5.7 Kumar, R. S., Robert, p. W. and Rao, D. C. B. N. (2017) 'A study on the impact of Demonetisation on Bombay Stock Exchange': (Kumar et al., 2017)

The aim of this paper is to assess the impact of demonetisation on the Indian Stock Market, represented by some sectoral indices of the Bombay Stock Exchange(BSE). The authors have only made use of secondary data i.e. pre and post demonetisation returns of each sector, to arrive at a conclusion that sectors that depended mainly on cash and consumption-based sectors, were negatively impacted, whereas financial sectors (public banks) showed positive results, however there are other variables that might affect the negative returns associated with stock prices such as US Presidential elections that occurred on the same date, and the subsequent effects on the US markets and currency. There has been no work on the part of the authors in terms of collecting data, to arrive at the conclusion.

5.8 Mukundan, A. (2017) ‘Impact of Demonetisation on Indian Stock Market .’ : (Mukundan, 2017)

The main objective of the paper is to assess the effect demonetisation has on the Indian Stock Market, represented by 54 companies listed on the NSE, using Statistical Analysis as the research method, analyzing average prices, traded quantity and total trades before and after the event. The inference from this paper is that demonetisation had an impact, albeit not a very significant one, on the stock market. The problem with this paper is that there was no benchmark set to assess the results, and so no fixed conclusion was given.

5.9 R, B., S, M., S, P. and Ananth, D. A. (2017) 'Impact of Demonetization on Indian Stock Market':(R et al., 2017)

The aim of the study is to analyse the impact of Demonetisation by testing the Efficient Market Hypothesis on the Indian Stock Market (represented by 16 companies listed on the NSE) with Demonetisation being the key factor. This research uses Empirical Analysis, Optimal Portfolio Construction (using the Sharpe Index Model) in order to arrive at a conclusion that the 4 sectors under study follow a random walk (demonetisation being a key factor), thus being an indication of an impact caused by demonetisation on the Stock Market.

6. THEORETICAL CONTEXT

This paper uses event-study methodology in order to determine the impact of demonetisation on the Stock Market. Event study is a statistical method used to measure the impact an event has on share returns(Sitthipongpanich, 2000). The aim of this methodology is to examine if the security-holders earn any abnormal or excess returns over a period of time due to the occurrence of an event(Peterson, 1989).

Event Study is conducted, based on certain assumptions:

· The market is efficient, and hence according to the Efficient Market Hypothesis, the stock prices will instantly reflect the impact of the event(Woon, 2005).

· The event is not anticipated and/or predicted.

· There are no other significant events taking place during the same event window, which may have a confounding effect on the stock prices(Sitthipongpanich, 2000).

Abnormal return is defined as the difference between the actual return of a share and it’s expected return(Tong, 2010).

In order to estimate Normal(expected) Returns, different types of models such as the Market Model, the Constant Mean Return Model, the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory can be used(Campbell et al., 1996). In this paper, we use the Market Model.

The Market Model states that the return on a share is dependent on the market return(Rm)(Harvey, 2011) and that the parameters of the Market Model i.e. the volatility of the security (β) and the intercept(α), are estimated using Ordinary Least Squares(OLS) regression(Sitthipongpanich, 2000).

The return as specified by the market model is given as:

Ri,t = αi + βi Rm,t + εi (Drake, 2018)

Where,

Ri,t = Return on a security at time t

αi = Intercept

βi = Volatility/Risk of the security

Rm,t = Market Return at time t

εi = Regression error

7. BIBLIOGRAPHY

1. Bantwa, A. (2017) 'A Study on Impact of Demonetization on Indian Stock Market and Selected Sectors of Indian Economy', Pacific Business Review International, 10(3), pp. 94-101.

2. Campbell, J., Lo, A. and MacKinlay, C. (1996) 'Event-Study Analysis', The Econometric of Financial Markets.

3. Chellasamy, D. P. and M, A. K. (2017) 'Impact of Demonetisation on Indian Stock Market: With Special Reference to Sectoral Indices in National Stock Exchange of India', IOSR Journal of Economics and Finance (IOSR-JEF), 8(3), pp. 51-54.

4. Dasgupta, D. (2016) 'Theoretical analysis of 'demonetisation'', Economic and Political Weekly, 51(51), pp. 67-71.

5. Dash, P. S. D. and Bagha, P. (2017) 'Impact of Demonetization on Stock Price Movements in Banking Sector of India', International Journal of Research and Scientific Innovation (IJRSI), IV(VIIS), pp. 33-36.

6. Drake, P. 2018. Estimating a Market Model: Step-by-step. Florida Atlantic University.

7. Dubey, N. D., Pandey, S. P. and Kumar, D. D. (2017) 'Demonetization Announcement Effect- A Case Study of Indian Stock Market', EPRA International Journal of Economic and Business Review, 5(10), pp. 148-153.