Empirical Regularities in the Intra-Week Trading Patterns of Foreign Institutional Investors in India

Abstract

In developed markets, particularly in US, it has been found that the individual investors use the Monday morning to frame their investment strategies for the coming week. Therefore, their investment activities remain sluggish on this day of the week. This, together with increased selling pressure from the individual investors on Monday, is thought to be partially responsible for the so called 'week-end effect'. Foreign Institutional Investors (FIIs) have occupied an important role in Indian stock market and their behaviour may have significant implication for market dynamics. This paper analyses the trading pattern of FIIs during different days of the week for six calendar years from 2000 to 2005. We find that both the buying and the selling volume of FIIs remain significantly low on Tuesday. The average level of buying volume (adjusted for trend) on Tuesday is about 83 percent of their average daily buying volume for all the days of the week taken together. Similarly, the average level of selling volume on Tuesday is only about 87 percent of the all days' average selling volume. This Tuesday-effect on the volume of FII trading is found robust in the sub-sample-wise analysis. However, no such regularity is observed in the trading patterns of local mutual funds. The FIIs, who follow the global investment strategies, possibly use Mondays at their headquarters for strategy formation. Since, it happens after the trading hours in India, their Indian arms may get the instructions only on Tuesday morning and use Tuesdays to frame their local investment strategies. This hypothesis provides a plausible explanation for observed sluggish investment activities of FIIs on Tuesday. This may also explain the significant negative stock returns observed in some countries outside US on Tuesday. We observe that the Tuesday-effect has become weak in the sub-sample period of later three years, which is seems to be a result of gaining more autonomy by agencies managing FII-funds in India.