Cause and effect between FII trading behaviour and stock market returns

Journal of Indian Business Research - 2012
AbhijeetChandra1
1Department of Commerce and Business Studies, Jamia Millia Islamia (Central University), New Delhi, India

Tóm tắt

PurposeThe purpose of this paper is to examine the direction of causality between foreign institutional investment (FII) trading volume and stock market returns in the Indian context. There is evidence of uni‐directional causalities from stock returns to FII flows across various sample periods. The paper attempts to establish whether net FII trading volume causes variations in stock market returns or vice versa.Design/methodology/approachUsing daily data on three different measures of FII trading volume as proxy for FII trading behaviour and S&P CNX Nifty returns, Granger‐causality approach is applied to investigate the bi‐directional causality between net FII trades and returns.FindingsBi‐directional causality between net FII investment and Indian stock market return is observed. In general, the FIIs seem to be chasing the Indian stock market returns. It is found that FII trading behaviour resulting in heavy trading volumes may cause variations in stock market returns only in the very short‐term, but afterwards, it is the stock market returns which cause changes in FII trading behaviour.Research limitations/implicationsSince foreign equity investors monitor the movement of stock prices, and furthermore, the role of FIIs' exerting impact on Indian stock markets tends to be growing, the authorities will have to develop an environment where FIIs would maintain their positions with confidence, thereby making the markets, as well as investments, more stable. This research considered only stock market returns to test its relationship with three measures of FII trading volume; more macroeconomic as well as microeconomic variables may further be considered for the purpose.Originality/valueThe paper contributes some empirical evidence using three different measures of FII trading volume as proxy of FII trading behaviour, and its bi‐directional relationship with Indian stock market returns.

Từ khóa


Tài liệu tham khảo

Babu, M.S. and Prabheesh, K.P. (2008), “Causal relationship between foreign institutional investments and stock returns in India”, International Journal of Trade and Global Markets, Vol. 1 No. 3, pp. 259‐65.

Bae, K.‐H., Chan, K. and Ng, A. (2002), “Invisibility and return volatility in emerging equity markets”, working paper, Hong Kong University of Science & Technology, Hong Kong.

Barber, B.M. and Odean, T. (2000), “Trading is hazardous to your health: the common stock investment performance of individual investors”, Journal of Finance, Vol. 55 No. 2, pp. 773‐806.

Batra, A. (2003), “The dynamics of foreign portfolio inflows and equity returns in India”, ICRIER Working Paper No. 109.

Bekaert, G. and Harvey, C.R. (1998), “Capital flows and emerging market equity returns”, NBER Working Paper No. 6669.

Bohn, H. and Tesar, L.L. (1996), “US equity investment in foreign markets: portfolio rebalancing or return chasing?”, American Economic Review, Vol. 86 No. 2, pp. 77‐81.

Bose, S. and Coondoo, D. (2004), “The impact of FII regulations in India: a time‐series intervention analysis of equity flows”, ICRA Bulletin Money and Finance, Vol. 2, pp. 18‐19.

Brennan, M.J. and Cao, H.H. (1997), “International portfolio investment flows”, Journal of Finance, Vol. 52 No. 5, pp. 1851‐80.

Chakrabarti, R. (2001), “FII flows to India: nature and causes”, ICRA Bulletin Money and Finance, October‐December, pp. 61‐81.

Chakraborty, T. (2007), “Foreign institutional investment flows and Indian stock market returns: a cause and effect relationship study”, Indian Accounting Review, Vol. 11 No. 1, pp. 35‐48.

Chayawaadi, C. and Ho, C. (2008), “Understanding Asian equity flows, market returns and exchange rates”, Bank for International Settlements, Working Paper No. 245.

Choe, Y., Kho, B.C. and Stulz, R.M. (1999), “Do foreign investors destabilize stock markets? The Korean experience in 1997”, Journal of Financial Economics, Vol. 54 No. 2, pp. 227‐64.

Christie, A.A. (1982), “The stochastic behaviour of common stock variances: value, leverage and interest rate effects”, Journal of Financial Economics, Vol. 10 No. 4, pp. 407‐32.

Committee on the Global Financial System (2009), “Capital flows and emerging market economies”, BIS CGFS Paper No. 33, BIS, Basel.

Danielsson, J. and Love, R. (2004), “Feedback trading”, Discussion Paper No. 510, Financial Market Group, London School of Economics and Political Science, London, UK.

De Long, J., Shleifer, A., Summers, L. and Waldmann, R. (1990), “Positive feedback investment strategies and destabilizing rational speculation”, Journal of Finance, Vol. 45 No. 2, pp. 379‐95.

Errunza, V. (2001), “Foreign portfolio equity investments, financial liberalization and economic development”, Review of International Economics, Vol. 9 No. 4, pp. 703‐26.

Fama, E. (1965), “The behavior of stock‐market prices”, Journal of Business, Vol. 38 No. 1, pp. 34‐105.

French, K.R., Schwert, G.W. and Stambaurg, R.F. (1987), “Expected stock returns and volatility”, Journal of Financial Economics, Vol. 19 No. 1, pp. 3‐29.

Gordon, J. and Gupta, P. (2003), “Portfolio flows into India: do domestic fundamentals matter?”, IMF Working Paper – WP/03/20.

Granger, C.W. (1969), “Investigating causal relation by econometric models and cross‐spectral methods”, Econometrica, Vol. 37 No. 3, pp. 424‐38.

Griffin, J.M. (2002), “Are the Fama and French factors global or country specific?”, Review of Financial Studies, Vol. 15 No. 3, pp. 783‐803.

Griffin, J.M., Harris, J.H. and Topaloglu, S. (2003), “The dynamics of institutional and individual trading”, Journal of Finance, Vol. 58 No. 6, pp. 2285‐320.

Griffin, J.M., Nardari, F. and Stulz, R.M. (2007), “Do investors trade more when stocks have performed well? Evidence from 46 countries”, Review of Financial Studies, Vol. 20 No. 3, pp. 905‐51.

Grinblatt, M. and Keloharju, M. (2000), “Distance, language, and cultural biases: the role of investor sophistication”, UCLA Working Paper.

Hamao, Y. and Mei, J. (2001), “Living with the enemy: an analysis of foreign investment in the Japanese equity market”, Journal of International Money and Finance, Vol. 20 No. 5, pp. 715‐35.

Hasbrouck, J. (1991), “Measuring the information content of stock trades”, Journal of Finance, Vol. 46 No. 1, pp. 179‐206.

Hong, H. and Stein, J.C. (2003), “Differences of opinion, short‐sales constraints and market crashes”, Review of Financial Studies, Vol. 16 No. 2, pp. 487‐525.

Inoue, T. (2009), “The causal relationship in mean and variance between stock returns and foreign institutional investment in India”, Margin – The Journal of Applied Economic Research, Vol. 3 No. 4, pp. 319‐37.

Jegadeesh, N. and Titman, S. (1993), “Returns to buying winners and selling losers: implications for stock market efficiency”, Journal of Finance, Vol. 48 No. 1, pp. 65‐91.

Jo, G.‐J. (2002), “Foreign equity investment in Korea”, Conference Proceedings of the Association of Korean Economic Studies (unpublished).

Kim, W. and Wei, S.‐J. (2002), “Foreign portfolio investors before andduring a crisis”, Journal ofInternational Economics, Vol. 56 No. 1, pp. 77‐96.

Mukherjee, J. and Bhattacharya, B. (2006), “An analysis of stock market efficiency in the light of capital inflows and exchange rate movements: the Indian context”, paper presented at 8th Annual Conference on Money and Finance, held at Indira Gandhi Institute of Developmental Research (IGIDR), Mumbai, India, 27‐28 March.

Mukherjee, P., Bose, S. and Coondoo, D. (2002), “Foreign institutional investment in Indian equity market: an analysis of daily flows during January 1999‐May 2002”, ICRA Bulletin Money and Finance, April‐September, pp. 21‐52.

Odean, T. (1998), “Volume, volatility, price, and profits when all traders are above average”, Journal of Finance, Vol. 53 No. 5, pp. 1887‐934.

Richards, A. (2005), “Big fish in small ponds: The trading behavior and price impact offoreign investors in Asian emerging equity markets”, Journal of Financial and Quantitative Analysis, Vol. 40 No. 1, pp. 1‐27.

Samarakoon, L.P. (2009), “The relation between trades of domestic and foreign investors and stock returns in Sri Lanka”, Journal of International Financial Markets, Institutions & Money, Vol. 19 No. 5, pp. 850‐61.

Sims, C.A. (1972), “Money, income, and causality”, American Economic Review, Vol. 62 No. 4, pp. 540‐52.

Thông tin
Thông tin xuất bản

Journal of Indian Business Research

Thông tin tác giả