Institutional Investors - Foreign and Domestic and its Impact on the Stock Market Volatility in India

Abstract

Foreign Institutional Investors have been instrumental in increasing the volume of trading in the Indian stock market since its beginning in the 1990s. Prior to that there was no or very less movement in the stock markets because of lack of funds and activity. It was the introduction of foreign institutional investors that brought the much needed liquidity to the stock market of the country. On the other hand there is another form of institutional investor that is domestic in its origin and it is the domestic institutional investor. The present paper tries to examine the role of FIIs and DIIs in the volatility of the Indian stock market proxied by Bombay Stock Exchange. Daily data for the period 2007-2016 has been taken to analyze the impact of foreign investors and domestic investors on the stock market. To check the non-stationarity of the time series the Augmented Dickey-Fuller (ADF) unit root test has been used and further statistical tools like mean, variance, standard deviation, skewness are used to examine the impact of institutional investors on Indian stock market volatility. Further Granger Causality and GARCH Modelling has been used to further strengthen the results. The study also tries to find out whether the movement of the two types of investors is in the same direction or in the opposite direction thereby reducing the volatility which would have been otherwise there in the absence of two opposite institutional investors.

Keywords: Causality, Domestic Institutional Investors, Foreign Institutional Investors, GARCH, Volatility

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