Investigation of Causality between FIIs’ Investment and Stock Market Returns Mohd. Aamir Khan Integrated Post Graduate ( B.Tech. + M.B.A. ) Students ABV-Indian Institute of Information Technology and Management, Gwalior - 474010 Rohit Integrated Post Graduate ( B.Tech. + M.B.A. ) Students ABV-Indian Institute of Information Technology and Management, Gwalior - 474010 Siddharth Goyal Integrated Post Graduate ( B.Tech. + M.B.A. ) Students ABV-Indian Institute of Information Technology and Management, Gwalior - 474010 Vinit Ranjan Integrated Post Graduate ( B.Tech. + M.B.A. ) Students ABV-Indian Institute of Information Technology and Management, Gwalior - 474010 Gaurav Agrawal Assistant Professor, ABV-Indian Institute of Information Technology and Management Gwalior - 474010 This paper investigates the causal relationship between Nifty and FIIs’ net investment for the period January, 1999 to February, 2009 using daily data. This period has been divided into four phases on the basis of major global events. Nifty and FII are not normally distributed in all four phases. Nifty was found to be non-stationary at level and stationary at first level while FII came out to be stationary at level itself. Correlation between FII and Nifty was the maximum in the bear phase as compared to all other phases. Further we found the causality between Nifty returns and FIIs net investment. Granger Causality highlighted unidirectional relationship of Nifty over FIIs during each phase in the long run. Variance decomposition and impulse response functions determined the short term causal relationship which reveals that there was only positive unidirectional causality from Nifty to FIIs. No reverse causality was observed in any phase Keywords: Stock return; FII; Unit root test; Correlation Test; Granger causality; Variance Decomposition; Impulse Response Function
Foreign Institutional Investors (FII) is used to denote an investor; mostly of the form of an institution or entity situated outside the country, which invests money in the financial markets of a country. FIIs in India are companies that are established or incorporated outside India, and is investing in the financial markets of India. Also, a domestic asset management company or domestic portfolio manager who manages funds raised from outside India for investment in India on behalf of a sub-account shall be deemed to be an FII. These investors must register with the Securities & Exchange Board of India
International Research Journal of Finance and Economics - Issue 40 (2010)
(SEBI) to take part in the market. After 1991, due to Indian liberalization process, FIIs were permitted to invest in Indian stock market. India, since then, has lowered the barriers for foreign investors through the FII. Statistics also suggest this fact as FIIs registered with SEBI have increased from 492 in 1999 to 1618 by February 2009. FIIs have played a very important role in building up forex reserves, which have enabled a host of economic reforms and also given the country a respectable place in the global community. In the present scenario, according to SEBI, about 30% of the total market share is captured by FIIs. The daily market capitalization as per the Business Beacon (CMIE Database) was Rs. 10582.5 crores during end Dec 2000 which increased to Rs. 65073.20 crores in end Dec 2008 in which there is a remarkable percentage of shareholding by FIIs. In May’09 alone, FIIs made gross purchase of equities worth Rs 55,001.10 crores and sold shares of Rs 39,719.30 crores, resulting in a net investment of Rs 15,281.60 crores. FIIs are also the most successful portfolio investors in India with 102 per cent appreciation since September 30, 2003. Individual investors customarily prefer short-term operations; mass media...