Time Varying Efficiency in Indian Sectors: An Event Study on Demonetization

Abstract

The study examines the level of inefficiency present in three different sectors of India. More specifically, it applies different estimation techniques to measure the level of efficiency across the agriculture, service and manufacturing sectors by choosing twenty stocks from each of them. Since there are multiple industries belonging to a particular sector, capturing the intra-industry differential in their efficiencies is also crucial. Presence of long range dependence and the time-varying efficiency across the industries belonging to different sectors have been tested. Then, the impact of recent macroeconomic event of Demonetization on these industries have been explored using six event windows. The results confirm that the impact of this event on the industry returns are mostly negative and significant. However, the magnitude of impact varies across industries depending on the level of demand uncertainty and their cash dependence. Finally, the robustness of our findings has been checked using fixed effect panel regression which further validates the results of the event study.

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Notes

  1. 1.

    Please see the link: http://statisticstimes.com/economy/sectorwise-gdp-contribution-of-india.php.

  2. 2.

    For Austria, Germany, Ireland, Estonia and Latvia banknotes and coins are acceptable to national central banks indefinitely.

  3. 3.

    Please see the link: https://economictimes.indiatimes.com/news/economy/policy/what-is-demonetisation-and-why-was-it-done/articleshow/55326862.cms.

  4. 4.

    The industry classification has been followed as per www.moneycontrol.com.

  5. 5.

    There are studies which have followed this method in sector or industry level studies (Orfila-Sintes and Mattsson 2009; Thornhill and White 2007).

  6. 6.

    As per RBI Bulletin November 2017, financial firms face challenges due to shift of currency demand, significant growth in bank deposits, detection of suspicious transactions etc. For detail, please refer: https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/IDFS5EBBDCCB9C274F0E921997DA8EC93CCA.PDF.

  7. 7.

    We have checked the same for value weighted portfolios and the results are almost similar.

  8. 8.

    As per industry experts, revenue for Auto Ancillary industry from cash dealing is close to 75%. Please see the link: https://www.hdfcbank.com/assets/pdf/privatebanking/Automobile_Demonetization_December2016.pdf.

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Acknowledgement

I would like to acknowledge the significant contribution made by Mr. Ujjawal Ranjan in preparing the initial draft. His skills and hardwork has enriched the quality of the paper.

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Correspondence to Samit Paul.

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Paul, S. Time Varying Efficiency in Indian Sectors: An Event Study on Demonetization. J. Quant. Econ. 18, 103–127 (2020). https://doi.org/10.1007/s40953-019-00171-1

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Keywords

  • Efficiency
  • Demonetization
  • Industry
  • Sector