Foreign Institutional Investment Flows and Equity Returns in India

The ICFAI Journal of Applied Finance, Vol. 11, pp. 16-30, March, 2005

Posted: 1 Nov 2010

See all articles by Khan Masood Ahmad

Khan Masood Ahmad

Jamia Millia Islamia (A Central University)

Shahid Ashraf

Jamia Millia Islamia (A Central University)

Shahid Ahmed

Jamia Millia Islamia (A Central University) - Economics

Date Written: 2005

Abstract

This paper examines the relationship between foreign institutional investment and stock returns in India during 2002-04. The Foreign Institutional Investment as a percentage of market capitalization and floating stock has been improving over the years. Using NSE Nifty and FII capital flows to the equity market, Granger-causality, Cross-correlation method and GARCH have been applied to analyze the static and dynamic relationship between FII flows and Nifty. Granger-causality shows a unidirectional relationship, indicating that equity returns cause FII flows, whereas Cross-correlation method shows some evidence of contemporaneous and bi-directional causality. This is an interesting result not reported earlier, and it is possible that the impact may be strong at the level of individual stock prices. The Foreign Institutional Investors (FIIs) seem to be positive feedback traders, as there is a strong positive relationship with lagged daily returns, and the results also show a significant relationship with future equity returns. Individually, there is significant volatility clustering in FII investments and Nifty series but there is no transmission or destabilizing effect. It is suggested that information on trade by FIIs must be made publicly available more speedily.

Suggested Citation

Ahmad, Khan Masood and Ashraf, Shahid and Ahmed, Shahid, Foreign Institutional Investment Flows and Equity Returns in India (2005). The ICFAI Journal of Applied Finance, Vol. 11, pp. 16-30, March, 2005. Available at SSRN: https://ssrn.com/abstract=1701154

Khan Masood Ahmad

Jamia Millia Islamia (A Central University)

Jamia Nagar, New Delhi
Delhi, Delhi 110025
India

Shahid Ashraf

Jamia Millia Islamia (A Central University) ( email )

Jamia Nagar, New Delhi
Delhi, Delhi 110025
India

Shahid Ahmed (Contact Author)

Jamia Millia Islamia (A Central University) - Economics ( email )

Jamia Nagar
New Delhi, 110025
India

HOME PAGE: http://jmi.ac.in/economics/faculty-members/Prof_Shahid_Ahmed-1783

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