The Dynamics Of Institutional Investments And Stock Market Volatility
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The Dynamics of Institutional Investments and Stock Market Volatility
Author | : Pramod Kumar Naik |
Publisher | : |
Total Pages | : 30 |
Release | : 2014 |
Genre | : |
ISBN | : |
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This study examines the dynamic interaction among institutional investment (FII and Mutual Funds) and the stock market returns for India in a three factor vector autoregression (VAR) framework. The data set used in this study are in daily frequency spanning from 1st Jan 2002 to 31st July 2012 and extracted from various sources such as PROWESS database of Center for Monitoring Indian Economy, the official website of Securities and Exchange Board of India (SEBI), Reserve Bank of India Official website and Bombay Stock Exchange. By considering the two types of flows (FIIs and mutual funds net equity investment) to be interdependent and hence form the endogenous part of the VAR system, we find that both mutual fund flows and the FII's fund flows are significantly influences Indian stock market. It is evident that the BSE returns (with lags) are positively influencing FII's flows but it turns to be negative in determining mutual fund investment flows during the study period. We observe similar kind of results after controlling for market fundamentals. The Granger causality analysis signifies a bi-directional causation between the institutional investment and stock market returns. The structural VAR impulse response analysis suggests that the response of Sensex return to both types of institutional investment flows are negligible or insignificant. However, the FII's net investment is positively responding to stock return about up to 3 days, and it is negatively responding to the mutual fund flows. The response of mutual fund net flows to stock return is initially positive but it turns to be negative in the next two days. It responds negatively to the FII net flows.
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