Institutional equity investments and stock market returns: an evidence in India

Abstract

This paper attempts to understand the difference, similarity and causality between FIIs and DIIs with each other and stock market returns for using VAR methodology, which includes both kinds of institutional investors as part of a single system. The results show that while FIIs fund flows significantly affect stock market returns, DII flows do not; FIIs buy more stocks when market rise and sell more when markets down, while DII sell more and purchase less when market rises; FII and DII net fund inflows are negatively correlated with each other; and a bidirectional Granger causality exists between institutional investment flow and stock market returns, suggesting that stock market contains information for FIIs and DIIs. FIIs and DIIs varying investment pattern could be due to absolute higher level of investment by FIIs vis-a-vis DIIs, market inefficiency could cause information asymmetry between different institutional investors, or DIIs may be required by certain government norms not to sell certain stocks or not trade at particular times to prevent market instability.