Indian Journal of Research in Capital Markets

Open Access Open Access  Restricted Access Subscription Access

An Analysis of Trading Behaviour of Foreign and Domestic Institutional Investors in the Indian Stock Market : An Empirical Study


Affiliations
1 Assistant Professor, School of Commerce and Management Studies, Dayananda Sagar University, Bangalore - 560 078, Karnataka, India

   Subscribe/Renew Journal


India is an attractive investment destination for foreign portfolio investors in order to earn higher returns and risk diversification. FPI investments have predominantly been increasing in the Indian stock market since 1992. In the past two years, domestic institutions have been strong players in the Indian equity markets. The systematic monthly inflows into mutual funds have been impressive, and hence, they have a lot of surplus cash to accumulate some good-quality stocks. This buying by DIIs has saved the market from steep falls during the periods when FIIs resorted to basket-selling. Hence, investment patterns and the behaviour of FPIs and DIIs are dissimilar in the Indian stock market. There is a need to study the presence of feedback trading and causality between institutional investments (FPIs and DIIs) in the Indian stock market. To analyze this, the study took 2440 daily observations (short run) from April 1, 2007 to November 31, 2017 and 128 monthly observations (long run) from April 30, 2007 to November 30, 2017. The total reference period for this study is 10 years and 8 months. The study applied Granger causality test and vector autoregressive model to check the causality and presence of feedback trading between the institutional investments and Nifty returns. The study found that FPIs are positive feedback traders, while DIIs are negative feedback traders in the short run. However, the feedback trading does not exist in the long run. Also, the study proved the existence of bidirectional causality between the institutional investments and the Indian stock market in the short run.

Keywords

FPIs, DIIs, Nifty Return, Feedback Trading, Granger Causality, VAR Model.

JEL Classification : C1, C22, E44, E2, G21.

Paper Submission Date : February 4, 2020 ; Paper Sent Back for Revision : February 25, 2020 ; Paper Acceptance Date : March 1, 2020.

User
Subscription Login to verify subscription
Notifications
Font Size

  • Agarwal, R. N. (1997). Foreign portfolio investment in some developing countries: A study of determinants and macroeconomic impact. Indian Economic Review, 32(2), 217–229.

  • Bekaert, G., & Harvey, C.R. (1997). Emerging equity market volatility. Journal of Financial Economics, 43(1), 29–77.

  • Bhagwat, Y., & Marinusdebruine. (2016). Contagion effects among foreign and domestic institutional investors: The case of the Indian stock market - Short note. Indian Journal of Economics & Business, 15(1), 173–179.

  • Chatrath, A., Ramchander, S., & Song, F. (1996). The role of futures trading activity in exchange rate volatility. The Journal of Futures Markets, 16(5), 561–584.

  • Dadhich, G., Chotia, V., & Chaudhry, O. (2015). Impact of foreign institutional investments on stock market volatility in India. Indian Journal of Finance, 9(10), 22–35. https://dx.doi.org/10.17010/ijf/2015/v9i10/79561

  • De, S., & Ghosh, K. D. (2019). Mutual fund and foreign institutional investors: Pre and post crisis dynamics. Indian Journal of Research in Capital Markets, 6(2), 7–19. https://dx.doi.org/10.17010/ijrcm/2019/v6/i2/146591

  • Dhingra, V. S., Gandhi, S., & Bulsara, H. P. (2016). Foreign institutional investments in India: An empirical analysis of dynamic interactions with stock market return and volatility. IIMB Management Review, 28(4), 212–224.

  • Divecha, A. B., Drach, J., & Stefek, D. (1992). Emerging markets: A quantitative perspective. The Journal of Portfolio Management, 19(1), 41–50.

  • Frankel, J.A., & Wei, S.- J. (1994). Yen bloc or dollar bloc ? Exchange rate policies of the East Asian economies. In, T. Ito & A. Krueger (eds.), Macroeconomic linkage: Savings, exchange rates, and capital flows, NBEREASE (Vol. 3, pp. 295–333). University of Chicago Press.

  • Garg, A., & Chawla, K.K. (2015). A study of trend analysis and relationship between foreign institutional investors (FIIs) & domestic institutional investors (DIIs). http://dx.doi.org/10.2139/ssrn.2623465

  • Grabel, L. (1995). Speculation-led economic development : A post-Keynesian interpretation of financial liberalization programmes in the Third World. International Review of Applied Economics, 9(2), 127–149.

  • Gujarati, D. N., & Porter, D. C. (2004). Basic econometrics. McGraw-Hill.

  • Kotishwar, A., & Alekhya, P. (2015). FII & DII fund flow impact of mutual funds inflows and outflows–A study. Madras University Journal of Business and Finance, 3(2), 87–93.

  • Kumar, S. S. S. (2007). Role of institutional investors in Indian stock market. Retrieved from http://dspace.iimk.ac.in/bitstream/handle/2259/392/sss%2bkumar.pdf?sequence=1&isAllowed=y

  • Kumar, K. S. V., & Devi, V. R. (2012). Impact of international financial flows on Indian stock markets–An empirical study. http://dx.doi.org/10.2139/ssrn.2255404

  • Kumar, P., Gupta, S. K., & Sharma, R. K. (2017). An empirical analysis of the relationship between FPI and Nifty Returns. The IUP Journal of Applied Economics, 16(3), 7–24.

  • Mukherjee, P., & Roy, M. (2011). The nature and determinants of investments by institutional investors in the Indian stock market. Journal of Emerging Market Finance, 10(3), 253–283.

  • Prasuna, C.A. (2000). Determinants of foreign institutional investment in India. Finance India, 14(2), 411–422.

  • Radelet, S., & Sachs, J. (1998). The onset of the East Asian financial crisis. National Bureau of Economic Research (Working Paper No. 6680). Retrieved from https://www.nber.org/papers/w6680.pdf

  • Saha, M. (2009). Stock market in India and foreign institutional investments: An appraisal. Journal of Business and Economic Issues, 1(1), 1–15.

  • Salar, S.A.A. (2017). Impact of domestic institutional investors on Indian stock market. Journal of Advanced Studies in Finance, 7(2), 146–154.

  • Sathish, P., & Srinivasan, K. S. (2018). Dynamic relationship between institutional investors and Indian stock market : An empirical analysis. IUP Journal of Applied Finance, 24(3), 5–15.

  • Srinivasan, P., & Kalaivani, M. (2013). Determinants of foreign institutional investment in India: An empirical analysis. Journal of Academic Research in Economics, 5(3), 361–375.

  • Thiripalraju, M., & Acharya, R. (2011). Dynamic interaction between institutional investment and stock returns in India: A case of FIIs and MFs. Indian Institute of Capital Markets, 4(2), 1–35.

  • Venkataraman, R., Srinidhi, V. R., & Chandramouli, A. S. (2017). Institutional investments and their influence on stock returns–An empirical study. Social Sciences, 06(63), 332–344.


Abstract Views: 305

PDF Views: 1




  • An Analysis of Trading Behaviour of Foreign and Domestic Institutional Investors in the Indian Stock Market : An Empirical Study

Abstract Views: 305  |  PDF Views: 1

Authors

P. Sathish
Assistant Professor, School of Commerce and Management Studies, Dayananda Sagar University, Bangalore - 560 078, Karnataka, India

Abstract


India is an attractive investment destination for foreign portfolio investors in order to earn higher returns and risk diversification. FPI investments have predominantly been increasing in the Indian stock market since 1992. In the past two years, domestic institutions have been strong players in the Indian equity markets. The systematic monthly inflows into mutual funds have been impressive, and hence, they have a lot of surplus cash to accumulate some good-quality stocks. This buying by DIIs has saved the market from steep falls during the periods when FIIs resorted to basket-selling. Hence, investment patterns and the behaviour of FPIs and DIIs are dissimilar in the Indian stock market. There is a need to study the presence of feedback trading and causality between institutional investments (FPIs and DIIs) in the Indian stock market. To analyze this, the study took 2440 daily observations (short run) from April 1, 2007 to November 31, 2017 and 128 monthly observations (long run) from April 30, 2007 to November 30, 2017. The total reference period for this study is 10 years and 8 months. The study applied Granger causality test and vector autoregressive model to check the causality and presence of feedback trading between the institutional investments and Nifty returns. The study found that FPIs are positive feedback traders, while DIIs are negative feedback traders in the short run. However, the feedback trading does not exist in the long run. Also, the study proved the existence of bidirectional causality between the institutional investments and the Indian stock market in the short run.

Keywords


FPIs, DIIs, Nifty Return, Feedback Trading, Granger Causality, VAR Model.

JEL Classification : C1, C22, E44, E2, G21.

Paper Submission Date : February 4, 2020 ; Paper Sent Back for Revision : February 25, 2020 ; Paper Acceptance Date : March 1, 2020.


References





DOI: https://doi.org/10.17010/ijrcm%2F2020%2Fv7i1%2F153629