Causality between Foreign Institutional Trading and Stock Market Retruns:A Study of S&P CNX Nifty

Abstract

Institutional investments have acquired a significant role in the Indian securities market. This study investigates the trading behaviour of foreign institutional investors (FIIs) in relation to Indian stock market returns as proxied by CNX Nifty and also analyses the interrelationship between both the returns and the investment patterns. The purpose of this paper is to inspect the direction of causal relationship between foreign institutional investment stock market returns in the Indian context. Various econometric tools like Unit root test, Regression analysis and Granger Causality test have been used for the analysis. The results revealed that there exists a Uni- directional causality from FII ratio of investment to Nifty returns representing Indian stock market return. In general, the FIIs seem to be following the Indian stock market returns. The analysis on the basis of simple regression model reveals that there exists a bi-directional causality between FIIs investments and Nifty returns. It confirms the applicability of Price pressure hypothesis as well as Feedback trading hypothesis in Indian stock market return.