Foreign institutional investors influence on stock markets.
Author: Dishant kante
Influence of FII Flows on stock market:
Expanding a business in India often demands substantial capital due to the country’s developmental needs. Seeking funds from foreign investors has been a common strategy, especially since India opened up its economy in 1992. In the fiscal year 2020-21, India witnessed record Foreign Institutional Investor (FII) investments, totaling approximately 2,76,000 Crores. FIIs typically invest in various financial instruments such as equities, debt, and derivatives, including indices futures and options. Different types of FIIs operate in India, including those investing directly in listed or unlisted entities, as well as through stock exchanges like Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFI). Despite the substantial inflow of FII funds, a recent study assessing their impact on the stock market, particularly the Sensex, revealed surprising results. The study found that while FIIs exhibit a high correlation with the Sensex, their investments in forms like equity, debt, debt-VRR, and hybrid instruments do not significantly affect the market index. Additionally, FIIs tend to enter the Indian market during periods of growth but withdraw during recessions, influenced by both domestic and international economic factors such as interest rates. Thus, while FII investments play a crucial role in India’s economy, their impact on market indices may be less pronounced than initially assumed.
Impact of Institutional Investors on Indian Stock Market Performance.
India’s burgeoning economy has attracted significant attention from both Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs), all eyeing promising returns. Understanding the impact of these investments on the Nifty50 index is crucial for gauging market behavior and sentiment. Studies by Karthikeyan and Mohana Sundaram (2012) highlight a positive correlation between FIIs and the Indian equity market, emphasizing that FIIs are not the sole drivers of market dynamics. Similarly, Bose and Mukherjee (2005) found that while the US stock market might not directly influence Indian markets, foreign institutional investors wield considerable global influence. Analyzing data from the NSE website, researchers conducted Granger causality tests, revealing a causal relationship from Nifty 50 to FII investments. This suggests that Nifty 50’s performance significantly impacts both FIIs and DIIs, particularly during the 2017-2022 period, with FIIs being more responsive to Nifty 50 fluctuations compared to DIIs, such as mutual funds. Such insights underscore the pivotal role of market indices in influencing investor decisions and market trends, shaping the trajectory of India’s stock market.
- A study of lead-lag relation between FIIs herding and stock market returns in emerging economies: evidence from India.
The liberalization of financial markets in emerging economies often leads to increased foreign ownership of stocks. This study aims to delve into the investment patterns and trading behaviors of Foreign Institutional Investors (FIIs) and their impact on the Indian stock market. Daily data from January 2003 to June 2014 was analyzed using vector autoregression and multivariate regression models. While foreign capital inflows can bolster the host country’s economy by promoting open and robust economic policies, they can also exacerbate financial market instability as funds can swiftly move to other countries during downturns. Several studies have identified herd behavior among FIIs in both developed and developing markets. This study specifically focuses on FIIs’ herding behavior and its relationship with stock prices in emerging markets. Results indicate that FIIs’ herding behavior is influenced by market returns and their own trading patterns, supporting the notion of feedback trading. The study establishes a lead-lag relationship between FIIs’ herding behavior and market returns, trading volume, and volatility, shedding light on the dynamics of foreign investment in the Indian stock market.
4.The foreign investors’ behaviours during the COVID-19 pandemic in emerging market.
Numerous academic studies have highlighted the significant impact of foreign investors (FIs) on economic growth (Anwar and Nguyen, 2010; Har, Teo, and Yee, 2008). While foreign investments are often seen as beneficial for economic growth, they can also introduce volatility, especially during events like the pandemic and recessions. Amid the COVID-19 pandemic, few studies have explored the influence of FII on stock market movements. This study focused on the Vietnamese stock market during the pandemic period from December 2019 to June 2021. Using the Gregory-Hansen Cointegration test, it identified structural breaks in VNINDEX returns. The study examined FIs’ trading behaviors during the pandemic, noting distinct activities in bull and bear markets and before and after structural changes due to the pandemic. It found a strong long-term relationship between FIs’ trading activities and the stock market index. FIs tended to employ asset pricing models and acted as market leaders during bull markets but followed the market during downturns. Interestingly, FIs lost their trend-setting role to domestic players during the pandemic, although both foreign and domestic investors exhibited herding behaviors. Unlike the 2007-2008 global financial crisis, large-scale herding by foreign investors during the pandemic did not significantly influence domestic investors, except during high volatility days. This underscores the importance for stock market regulators in emerging economies to recognize the growing influence of domestic investors and implement policies to enhance their financial literacy and market efficiency for sustainable growth.
5.Causes and Impacts of Foreign and Domestic Institutional Investors’ Herding in the Taiwan Stock Market.
In the Taiwan stock market, foreign institutional investors (FIIs) play a dominant role compared to other investor groups, despite having a smaller share of ownership. Their trading activities, both in terms of volume and value, significantly outweigh those of individual investors. FIIs tend to employ long-term strategies but also engage in periodic overbuying or overselling of stocks to influence prices. They often exhibit herding behavior, following either their own or other FIIs’ trades, especially in large-cap securities. This herding tendency increases during bullish market periods, particularly in large-cap stocks. The causes of FIIs’ herding behavior stem from cross-sectional correlation signals and the tendency to follow similar indicators. This study suggests that trading disclosure by FIIs in emerging markets like Taiwan is essential for policymakers to understand and regulate market dynamics effectively. Understanding these patterns can help mitigate market volatility and promote stability in the Taiwan stock market.
6.Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Equity Markets
This study delves into the trading behavior and impact of foreign investors in six East Asian equity markets, covering both main and technology-focused boards. Foreign investors are required to register with local regulators, and their trades are closely watched. Analysis shows a positive correlation in net inflows, indicating common influencing factors. The study also reveals that foreign investors’ trading decisions are significantly affected by recent returns in both global and domestic equity markets. This underscores the substantial influence of foreign investors and conditions in mature markets on emerging markets, which could potentially lead to destabilizing effects. Policymakers are urged to bolster market institutions to better handle inflows, outflows, and associated price changes, ensuring the resilience of emerging markets to external pressures and fluctuations.
7.Foreign Institutional Investors and Corporate Green Innovation: Evidence from an Emerging Economy:
In response to global concerns about climate change, this study investigates the role of Foreign Institutional Investors (FIIs) in driving green innovation within Chinese companies. FIIs are seen as key players in promoting sustainable development, with potential to influence corporate efforts to reduce carbon emissions. The research, spanning from 2009 to 2020, analyzes data from 1,547 FIIs across 34 jurisdictions and 3,596 listed Chinese companies. Using regression models, the study finds a positive and robust correlation between FIIs and green innovation in Chinese firms. Interestingly, FIIs from regions with strong environmental awareness and commitment to green technology, as well as those adhering to the UN Principles for Responsible Investment (UNPRI), have a more significant impact on green innovation. The study suggests that environmental information disclosure and monitoring mechanisms play a crucial role in this relationship. As a result, policymakers are urged to assess the quality of FIIs, favoring those with strong environmental governance practices, and encourage FIIs to prioritize green innovation when investing in Chinese enterprises. This research contributes to understanding how FIIs can drive sustainable development and offers valuable policy insights for emerging economies looking to attract foreign investment while promoting environmental sustainability.
8.Stock Index Futures Prices and the Asian Financial Crisis.
This study examines the behavior of Kuala Lumpur Index Futures (FKLI) prices during the Asian Financial Crisis, revealing notable findings. Initially, FKLI prices traded at a discount since 1995, but by early 1997, they surged to a premium. As the crisis hit in July 1997, FKLI prices sharply deviated from their theoretical values, attributed to factors like herding behavior and liquidity constraints. Despite minor deviations in the first year and a half of trading, prices drastically diverged during the crisis, mostly trading below theoretical values. The market was primarily influenced by foreign institutions, which decreased after capital control regulations. Notably, domestic institutions impacted short-term price changes, while foreign institutions and domestic retailers influenced permanent price shifts. These findings highlight challenges in regulating markets during crises, underscoring liquidity constraints and limited institutional participation as obstacles to the growth of emerging market futures markets. This study sheds light on the complexities of derivative securities during financial crises, emphasizing the need for effective regulation and market participation to ensure market stability and growth.
- Dynamics of FII flows and stock market returns in a major developing country and How does economic uncertainty matter?
This report investigates how economic uncertainty influences the relationship between Foreign Institutional Investor (FII) flows and stock market returns in India, offering insights for policymakers and investors. Using wavelet analysis, it reveals that economic uncertainty affects both FII flows and stock market returns, especially during uncertain times when their movements are more closely aligned. However, the causality between these variables becomes less clear amidst economic uncertainty. The report stresses the importance of a transparent economic environment to fully harness the positive impact of FII flows on the financial market. The literature review underscores the complexity of the relationship between FII flows and stock market returns, emphasizing the need for innovative analytical approaches like wavelet coherency analysis to capture their dynamic nature across time and frequency domains. It also highlights the significance of economic policy uncertainty in shaping this relationship. In conclusion, the report underscores the critical role of FII flows in India’s financial market development and economic growth, while advocating for more comprehensive analyses that consider the dynamic interplay of economic and financial variables. Ultimately, it calls for transparent economic policies to maximize FII benefits and manage market volatility effectively, advising policymakers to create a conducive environment and portfolio managers to hedge against short-term fluctuations caused by economic uncertainty.
The research focuses on understanding how Foreign Institutional Investors (FIIs) impact the Bombay Stock Exchange (BSE) and its different sectors. It explores how the Indian financial market has evolved over time, especially with the development of well-structured capital markets and regulatory bodies. The Bombay Stock Exchange (BSE), established in 1875, is highlighted as the oldest stock exchange in India, and the creation of the Sensex index in 1986 marked a significant milestone.
Using statistical tools like regression analysis and the GARCH (1,1) model, the study analyses data from 2007 to 2017 to uncover patterns in market volatility and the relationship between FIIs and sectoral indices. The findings reveal that FIIs have a substantial influence on both the overall BSE Sensex and specific sectors within the market.
Descriptive statistics provide insights into the performance and volatility of different sectors, with sectors like banking and FMCG showing higher returns and lower volatility compared to sectors like telecom and reality.
In conclusion, the study emphasizes the importance of FIIs in shaping market outcomes and suggests that their investment patterns impact market returns and stability. It also highlights the significance of strong macroeconomic fundamentals and institutional reforms to ensure market stability and investor confidence.
10.Net FII Flows into India: A Cause and Effect Study
The study investigated the influence of foreign institutional investors (FIIs) on India’s economy from April 2003 to March 2011. It found that FIIs’ investments were significantly linked to the performance of the Indian stock market, particularly the BSE Sensex. Additionally, there was a mutual reinforcement between net FII inflows and the BSE Sensex, suggesting a bi-directional causality.The research highlighted that FII inflows led to an increase in India’s foreign exchange reserves, which bolstered the country’s credibility in international financial markets. Moreover, interest rate differentials between India and other countries attracted further FII investments. The study also noted that growth in the Index of Industrial Production (IIP) positively influenced market sentiment and attracted more FII flows.However, the analysis didn’t find a significant impact of FII inflows on other variables like wholesale price index (WPI), exchange rates, and forward premium. It concluded that FII investments play a crucial role in capital formation, contributing to economic growth and enhancing corporate governance practices. Despite criticisms regarding speculative behavior, FII inflows offer advantages such as non-debt creating capital influx and shifting exchange rate risks to foreign investors.Overall, the findings suggest policymakers should maintain existing policies to attract FII investments, considering their positive impact on the Indian economy, particularly on the stock market and foreign exchange reserves.
Summary of entire topic :
Several studies explore the impact of foreign investors on emerging economies’ financial markets. In India, economic uncertainty influences the relationship between Foreign Institutional Investor (FII) flows and stock market returns. Wavelet analysis reveals stronger co-movements during uncertain times, but causality between variables becomes unclear. A transparent economic environment is crucial for maximizing FII benefits. Meanwhile, studies on the Kuala Lumpur Index Futures (FKLI) market during the Asian Financial Crisis uncover significant mispricing trends, attributed to herding behavior and liquidity constraints. This highlights challenges in regulating markets during crises. Additionally, research on green innovation in Chinese companies shows a positive correlation between FII presence and green initiatives, particularly from investors with strong environmental awareness. Finally, insights into East Asian equity markets demonstrate the substantial influence of foreign investors and mature market conditions on emerging markets, emphasizing the need for robust market institutions to withstand external pressures and fluctuations.
references:
AJMERA, B. C and CHAUHAN, F. R.(2022) Influence of FII Flows on Indian Stock Market: An Empirical Study. IUP Journal of Applied Finance, [s. l.], v. 28, n. 2, p. 47–58, 2022. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=e2a45c32-20f5-395d-96d7-375f853a2f01. Acesso em: 25 fev. 2024.
FANG, H. et al(2017) Causes and Impacts of Foreign and Domestic Institutional Investors’ Herding in the Taiwan Stock Market. Emerging Markets Finance & Trade, [s. l.], v. 53, n. 4, p. 727–745, 2017. DOI 10.1080/1540496X.2015.1103126. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=ac91b821-f476-3eeb-9e31-85398db5c147. Acesso em: 25 fev. 2024.
GARG, A. and MITRA, S (2015). A study of lead-lag relation between FIIs herding and stock market returns in emerging economies: evidence from India. Decision (0304-0941), [s. l.], v. 42, n. 3, p. 279–292, 2015. DOI 10.1007/s40622-015-0080-6. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=8049e0db-c41b-314f-a6de-c1a8a46244d8. Acesso em: 25 fev. 2024.
HASSAN, T. et al.(2007) Stock Index Futures Prices and the Asian Financial Crisis. International Review of Finance, [s. l.], v. 7, n. 3/4, p. 119–141, 2007. DOI 10.1111/j.1468-2443.2007.00071.x. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=88a56d78-59f3-3a69-96a0-e41ec8b74021. Acesso em: 25 fev. 2024.
HUAN HUU NGUYEN and VU MINH NGO ,et al (2023). The foreign investors’ behaviours during the COVID-19 pandemic in emerging market. Applied Economics Letters, [s. l.], v. 30, n. 3, p. 384–390, 2023. DOI 10.1080/13504851.2021.1988887. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=caacf01d-69b2-3936-803e-32126dce205e. Acesso em: 25 fev. 2024.
JAIN, A (2022). Impact of Institutional Investors on Indian Stock Market Performance. IUP Journal of Applied Finance, [s. l.], v. 28, n. 4, p. 5–29, 2022. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=1bfe6562-e30a-32ec-81da-21d3fcfd4e1e. Acesso em: 25 fev. 2024.
JENA and S. K. et al(2020) Dynamics of FII flows and stock market returns in a major developing country: How does economic uncertainty matter? World Economy, [s. l.], v. 43, n. 8, p. 2263–2284, 2020. DOI 10.1111/twec.12830. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=70fe1cc7-8a12-3317-8a12-393b9b23ab75. Acesso em: 25 fev. 2024.
LIU, H. et al (2023). Foreign Institutional Investors and Corporate Green Innovation: Evidence from an Emerging Economy. Emerging Markets Finance & Trade, [s. l.], p. 1–14, 2023. DOI 10.1080/1540496x.2023.2300630. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=3b1e6375-3937-38df-b161-5479b63bd872. Acesso em: 25 fev. 2024.
RICHARDS,A(2005). Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Equity Markets. Journal of Financial & Quantitative Analysis, [s. l.], v. 40, n. 1, p. 1–27, 2005. DOI 10.1017/S0022109000001721. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=3aa6dc76-c81e-37a1-89d1-5ea6a51c64ca. Acesso em: 25 fev. 2024.
SRIKANTH, M and KISHORE, B(2012). Net FII Flows into India: A Cause and Effect Study. ASCI Journal of Management, [s. l.], v. 41, n. 2, p. 107–120, 2012. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=46c8065a-342f-3f34-8e49-acb25c1fd6d5. Acesso em: 25 fev. 2024.