How volatility affects the behaviour of institutional investors in emerging markets

Abstract

The investments made by domestic institutional investors (DII) have turned out to be a dynamic force for the development of Indian stock markets. This situation has motivated me to study the nexus between DII's capital flows and stock market volatility. Most studies have taken mutual funds as the proxy for DII. This paper has considered the disintegrated data of DII, which includes mutual funds and insurance companies, banks, and development financial institutions (DFI). The study discloses that out of four DII, insurance companies increase the market volatility. On the other hand, trading of banks, mutual funds, and DFI are helping to decrease the volatility in stock markets. Thus, they contribute to correct the overreaction in stock markets resulting from noise trading. Moreover, all the DII's act as informed traders because they take advantage of the volatile markets for investments.