The present study considers the demonetization on November 8, 2016, by the Government of India as a significant event in the history of the Indian economy. Hence, the required analyses have been performed considering pre- and post-data of such an event. The main motive behind conducting this study is to examine the relationship of foreign institutional investments (FIIs) and domestic institutional investments (DIIs) with the stock market returns. For the purpose of analyses, the foreign institutional investments (FIIs) are represented by FII Gross Purchase and FII Gross Sales. The domestic institutional investments (DIIs) are represented as DII Gross Purchase and DII Gross Sales. Moreover, Nifty 50 Index Returns and sector-wise index returns are used as a proxy to stock market returns. The sectoral indices considered for analyses include Nifty Auto Index, Nifty FMCG Index, Nifty Financial Services Index, Nifty IT Index, Nifty Metal Index, Nifty Media Index, Nifty Pharma Index, Nifty Private Bank Index, Nifty PSU Bank Index and Nifty Realty Index.
The stock returns have been computed using the following formula:
$${\text{Stock}}\;{\text{Returns }} = {\text{ Ln}}\; (P_{0} /P_{1} )$$
where P0 is the current period price and P1 is the price of the previous period. The returns are converted into log-normal form to maintain the normality of data. The variables of FII and DII are also computed as growth for better analyses. The study considers a period of 686 days, i.e., from June 11, 2015, to March 27, 2018, considering the demonetization date as November 8, 2016. This implies 343 days pre- and 343 days post-demonetization. The data pertaining to FII and DII have been extracted from the official website of the Securities Exchange Board of India (SEBI) and moneycontrol.com. The closing prices of various indices have been obtained from the official website of the National Stock Exchange. The study made use of various statistical techniques such as summary statistics, correlation analysis and regression analysis. Also, the entire data were tested for stationarity, serial correlation and heteroscedasticity using the augmented Dickey–Fuller (ADF) test, Breusch–Godfrey Serial Correlation LM Test and Breusch–Pagan–Godfrey Heteroscedasticity Test, respectively.
The impact of demonetization on FIIs, DIIs and stock market returns was evaluated using regression analysis. For this purpose, study involved creation of dummy variables. Following were the sets of equations framed (Eqs. 1–15) for the purpose of such analyses where FIIs, DIIs and stock market returns have been assigned as endogenous variables and their dummies as regressors:
$${\text{FII}}\;{\text{ Gross}}\;{\text{ Purchase}} = \alpha_{1} + \beta_{1} {\text{Dummy}}\;{\text{ FII}}\;{\text{ Gross}}\;{\text{ Purchase}} + \varepsilon_{1}$$
(1)
$${\text{FII}}\;{\text{ Gross }}\;{\text{Sales}} = \alpha_{2} + \beta_{2} \;{\text{Dummy}}\;{\text{ FII}}\;{\text{ Gross}}\;{\text{ Sales}} + \varepsilon_{2}$$
(2)
$${\text{DII }}\;{\text{Gross}}\;{\text{ Purchase}} = \alpha_{3} + \beta_{3} \;{\text{Dummy}}\;{\text{ DII}}\;{\text{Gross}}\;{\text{Purchase}} + \varepsilon_{3}$$
(3)
$${\text{DII}}\;{\text{Gross}}\;{\text{Sales}} = \alpha_{4} + \beta_{4} \;{\text{Dummy}}\;{\text{ DII}}\;{\text{ Gross}}\;{\text{ Sales}} + \varepsilon_{4}$$
(4)
$${\text{Nifty }}\; 5 0 { }\;{\text{Index }}\;{\text{Returns}} = \alpha_{5} + \beta_{5} \;{\text{Dummy}}\;{\text{ Nifty }}\; 5 0\;{\text{ Index }}\;{\text{Returns}} + \varepsilon_{5}$$
(5)
$${\text{Nifty}}\;{\text{ Auto}}\;{\text{ Index}}\;{\text{ Returns}} = \alpha_{6} + \beta_{6} \;{\text{Dummy}}\;{\text{ Nifty }}\;{\text{Auto}}\;{\text{ Index }}\;{\text{Returns}} + \varepsilon_{6}$$
(6)
$${\text{Nifty }}\;{\text{Financial}}\;{\text{ Services}}\;{\text{ Index }}\;{\text{Returns}} = \alpha_{7} + \beta_{7} \;{\text{Dummy}}\;{\text{ Nifty}}\;{\text{ Financial }}\;{\text{Services }}\;{\text{Index}}\;{\text{ Returns}} + \varepsilon_{7}$$
(7)
$${\text{Nifty }}\;{\text{FMCG}}\;{\text{ Index }}\;{\text{Returns}} = \alpha_{8} + \beta_{8} \;{\text{Dummy}}\;{\text{ Nifty }}\;{\text{FMCG}}\;{\text{ Index}}\;{\text{ Returns}} + \varepsilon_{8}$$
(8)
$${\text{Nifty}}\;{\text{ IT}}\;{\text{ Index}}\;{\text{ Returns}} = \alpha_{9} + \beta_{9} \;{\text{Dummy}}\;{\text{ Nifty}}\;{\text{ IT}}\;{\text{ Index}}\;{\text{ Returns}} + \varepsilon_{9}$$
(9)
$${\text{Nifty }}\;{\text{Media}}\;{\text{ Index }}\;{\text{Returns}} = \alpha_{10} + \beta_{10} \;{\text{Dummy}}\;{\text{ Nifty }}\;{\text{Media }}\;{\text{Index }}\;{\text{Returns}} + \varepsilon_{10}$$
(10)
$${\text{Nifty }}\;{\text{Metal }}\;{\text{Index }}\;{\text{Returns}} = \alpha_{11} + \beta_{11} \;{\text{Dummy}}\;{\text{ Nifty }}\;{\text{Metal}}\;{\text{ Index}}\;{\text{ Returns}} + \varepsilon_{11}$$
(11)
$${\text{Nifty }}\;{\text{Pharma}}\;{\text{ Index }}\;{\text{Returns}} = \alpha_{12} + \beta_{12} \;{\text{Dummy}}\;{\text{ Nifty}}\;{\text{ Pharma}}\;{\text{ Index}}\;{\text{ Returns}} + \varepsilon_{12}$$
(12)
$${\text{Nifty }}\;{\text{PSU }}\;{\text{Bank}}\;{\text{ Index }}\;{\text{Returns}} = \alpha_{13} + \beta_{13} \;{\text{Dummy}}\;{\text{ Nifty}}\;{\text{ PSU }}\;{\text{Bank}}\;{\text{ Index }}\;{\text{Returns}} + \varepsilon_{13}$$
(13)
$${\text{Nifty}}\;{\text{Private }}\;{\text{Bank}}\;{\text{ Index }}\;{\text{Returns}} = \alpha_{14} + \beta_{14} {\text{Dummy }}\;{\text{Nifty }}\;{\text{Private }}\;{\text{Bank}}\;{\text{ Index}}\;{\text{ Returns}} + \varepsilon_{14}$$
(14)
$${\text{Nifty }}\;{\text{Realty}}\;{\text{ Index}}\;{\text{ Returns}} = \alpha_{15} + \beta_{15} \;{\text{Dummy}}\;{\text{ Nifty}}\;{\text{ Realty}}\;{\text{ Index}}\;{\text{ Returns}} + \varepsilon_{15}$$
(15)
where
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FII Gross Purchase, FII Gross Sales, DII Gross Purchase, DII Gross Sales, Nifty 50 Index Returns, Nifty Auto Index Returns, Nifty Financial Services Index Returns, Nifty FMCG Index Returns, Nifty IT Index Returns, Nifty Media Index Returns, Nifty Metal Index Returns, Nifty Pharma Index Returns, Nifty PSU Bank Index Returns, Nifty Private Bank Index Returns and Nifty Realty Index Returns are represented as Dependent Variables.
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α1, α2, α3, α4, α5, α6, α7, α8, α9, α10, α11, α12, α13, α14 and α15 are intercept terms.
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β1, β2, β3, β4, β5, β6, β7, β8, β9, β10, β11, β12, β13, β14 and β15 are slope coefficients.
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Dummy FII Gross Purchase, Dummy FII Gross Sales, Dummy DII Gross Purchase, Dummy DII Gross Sales, Dummy Nifty 50 Index Returns, Dummy Nifty Auto Index Returns, Dummy Nifty Financial Services Index Returns, Dummy Nifty FMCG Index Returns, Dummy Nifty IT Index Returns, Dummy Nifty Media Index Returns, Dummy Nifty Metal Index Returns, Dummy Nifty Pharma Index Returns, Dummy Nifty PSU Bank Index Returns, Dummy Nifty Private Bank Index Returns and Dummy Nifty Realty Index Returns are represented as Independent Variables.
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ε1, ε2, ε3, ε4, ε5, ε6, ε7, ε8, ε9, ε10, ε11, ε12, ε13, ε14 and ε15 are errors terms which are assumed to be 0.
The study used pre-dummy variables, as well as post-dummy variables and ordinary least square (OLS) method, which have been utilized for regression analysis. The required statistical and econometric analyses have been performed using econometric software E-views and sorted using Microsoft Excel.
The necessary hypotheses framed to boost the regression analyses were as follows:
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Hypothesis 1 H0: There exists no significant impact of demonetization on FII Gross Purchase.
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Hypothesis 2 H0: There exists no significant impact of demonetization on FII Gross Sales.
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Hypothesis 3 H0: There exists no significant impact of demonetization on DII Gross Purchase.
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Hypothesis 4 H0: There exists no significant impact of demonetization on DII Gross Sales.
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Hypothesis 5 H0: There exists no significant impact of demonetization on Nifty 50 Index Returns.
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Hypothesis 6 H0: There exists no significant impact of demonetization on Nifty Auto Index Returns.
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Hypothesis 7 H0: There exists no significant impact of demonetization on Nifty Financial Services Index Returns.
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Hypothesis 8 H0: There exists no significant impact of demonetization on Nifty FMCG Index Returns.
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Hypothesis 9 H0: There exists no significant impact of demonetization on Nifty IT Index Returns.
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Hypothesis 10 H0: There exists no significant impact of demonetization on Nifty Media Index Returns.
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Hypothesis 11 H0: There exists no significant impact of demonetization on Nifty Metal Index Returns.
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Hypothesis 12 H0: There exists no significant impact of demonetization on Nifty Pharma Index Returns.
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Hypothesis 13 H0: There exists no significant impact of demonetization on Nifty PSU Bank Index Returns.
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Hypothesis 14 H0: There exists no significant impact of demonetization on Nifty Private Bank Index Returns.
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Hypothesis 15 H0: There exists no significant impact of demonetization on Nifty Realty Index Returns.
The hypotheses framed for the purpose of the augmented Dickey–Fuller test were as follows:
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Hypothesis 1 H0: The data pertaining to FII Gross Purchase have a Unit Root.
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Hypothesis 2 H0: The data pertaining to FII Gross Sales have a Unit Root.
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Hypothesis 3 H0: The data pertaining to DII Gross Purchase have a Unit Root.
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Hypothesis 4 H0: The data pertaining to DII Gross Sales have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty 50 Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Auto Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Financial Services Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty FMCG Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty IT Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Media Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Metal Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Pharma Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty PSU Bank Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Private Bank Index Returns have a Unit Root.
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Hypothesis 5 H0: The data pertaining to Nifty Realty Index Returns have a Unit Root.