An Econometric Study of Trading Behaviour of Institutional Investors in Indian Stock Market: The Vector Auto Regression Approach

Abstract

The present paper endeavours to study the trading behaviour of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) in Indian stock market. The study ascertains whether the purchase trade and sale trade behaviour of foreign institutional investors is different from their domestic counterparts and whether their trading pattern remains persistent over time. The paper adopts multivariate Vector Auto Regression (VAR) approach to analyse these issues. As compared to earlier studies, the present paper uses a wider definition of domestic institutional investors (DIIs) that includes not only mutual funds (MFs) but also banks, insurance companies and other domestic financial institutions. The outcome of the analysis indicate that the foreign institutional investors (FIIs) appear to be very short term momentum buyers in their purchase trade and appear to be neither momentum nor contrarian sellers in their sale trade. Additionally the trading behaviour of both foreign and domestic institutional investors also shows the evidence of contemporaneous trade and intra group herding in Indian stock market. The Variance Decomposition Analysis also indicates that trading behaviour of institutional investors and market index returns have impact on each other in Indian stock market.

Keywords: Foreign Institutional Investors, Domestic Institutional Investors, Indian Stock Market, Vector Auto Regression, Momentum Trading, Contrarian Trading, Variance Decomposition Analysis

JEL Classification: F3, G11, G12, G15