Long memory investigation during demonetization in India

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Long-range dependence (LRD) in financial markets remains a key factor in determining whether there is market memory, herding traces, or a bubble in the economy. Usually referred to as ‘Long Memory’, LRD has remained a key parameter even today since the mid-1970s. In November 2016, a sudden and drastic demonetization measure took place in the Indian market, aimed at curbing money laundering and terrorist funding. This study is an attempt to identify market behavior using long-range dependence during those few days in demonetization. Besides, it tries to identify nascent traces of bubble and embedded herding during that time. Auto Regressive Fractionally Integrated Moving Average (ARFIMA) is used for three consecutive days around the event. Tick-by-tick data from CNX Nifty High Frequency Trading (CNX Nifty HFT) is used for three consecutive days around demonetization (approximately, 5000 data points from morning trading sessions on each of the three days). The results show a clear and profound presence of herd behavior in all three data sets. The herd intensity remained similar, indicating a unique mixture of both ‘Noah Effect’ and ‘Joseph Effect’, proving a clear regime switch. However, the results on the event day show stable and prominent herding. Mandelbrot’s specified effects were tested on an uncertain and sudden financial event in India and proved to function perfectly.

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    • Figure 1. ACF graph for November 10, 2016 depicting slow ACF decay indicating long memory
    • Figure 2. ACF graph for November 8, 2016 depicting slow ACF decay indicating long memory
    • Figure 3. ACF graph for November 9, 2016 depicting slow decay of ACF indicating long memory
    • Table 1. Various zones of Hurst exponent (H)
    • Table 2. Hurst exponent calculated by ARFIMA with its goodness of fit for consecutive three days around the event
    • Table 3. Hurst exponent calculated by ARFIMA with its goodness of fit intraday on November 9, 2016
    • Conceptualization
      Bikramaditya Ghosh, Aniruddha Oak
    • Data curation
      Bikramaditya Ghosh, Saleema J. S., Manu K. S.
    • Formal Analysis
      Bikramaditya Ghosh
    • Investigation
      Bikramaditya Ghosh, Aniruddha Oak
    • Writing – original draft
      Bikramaditya Ghosh, Aniruddha Oak, Sangeetha R.
    • Writing – review & editing
      Bikramaditya Ghosh, Aniruddha Oak, Sangeetha R.
    • Software
      Saleema J. S.
    • Validation
      Saleema J. S., Manu K. S., Sangeetha R.
    • Visualization
      Saleema J. S.
    • Methodology
      Manu K. S.