Dynamism of FII flows and Expected Volatility in Indian Stock Markets : An Empirical Analysis

This study is aimed at exploring the inter-relationships of Foreign Institutional Investor (FII) flows and option implied Volatility Index (VIX).Studies on the FII flows and realized volatility provide a ground work for this research. Covering over 7 years' time period, this paper establishes the importance of VIX i.e. expected volatility in explaining the FII flows into the Indian stock market.Very strong evidence has been proposed by the Granger Causality test which confirms the uni-directional flow of causality from option implied volatility to FII investments into Indian markets. VAR model developed in the study has high explanatory power in explaining VIX but not the FII flows.

Keywords

FIIs, Granger Causality, Illiquidity, Stock Market, VIX, Volatility

References

Aswini, Kumar Mayank (2014), Impact of FII on Stock Market in India, Global Journal of Finance and Management, Vol. 6, No. 8, pp. 765–770.
Amihud Yakov (2002), Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, Journal of Financial Markets, Vol. 5, pp. 31–56.
Anand Kshitij (2015), Top Five Factors which are Making Indian Stock Market Volatile, retrieved from:
http://economictimes.indiatimes.com/articleshow/47279497.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Chadha Neetu, Saxena Sakshi (2014), Co-Movements of and Linkages between NSE and NYSE, DIAS Technology Review, Vol. 11, No. 1, April–September, pp. 8–15.
Chakraborty Tanupa (2007), Foreign Institutional Investment Flows and Indian Stock Market Returns: A Cause and Effect Relationship Study, Indian Accounting Review, Vol. 11, No. 1, June, pp. 35–48.
Coondoo Dipankar, Mukherjee Paramita (2004), Volatility of FII in India, ICRA Bulletin Money & Finance, Oct 2003–March 2004, pp. 85–102.
De Suddhasanta, Chakrabarty Tanupa (2016), FII Flow and Volatility Expectations in Indian Equity Markets, The IUP Journal of Applied Finance, Vol. 22, No. 1 (January), pp. 5–15.
Foreign Institutional Investors (2016), retrieved from:
https://www.ibef.org/economy/foreign-institutional-investors.aspx
Joo Bashir Ahmad, Mir Zahoor Ahmad (2014), Impact of FIIs Investment on Volatility of Indian Stock Market: An Empirical Investigation, Journal of Business & Economic Policy, Vol. 1, No. 2 (December), pp. 106–114.
Kaur Balwinder (2016), Effect of Mutual Funds (MFs) Investments and Foreign Institutional Investors (FIIs) Investments on the Indian Stock Market: An Empirical Analysis, DIAS Technology Review, Vol. 13, No. 1, April–September.
Kumar Rakesh, Gautam Sarita (2014), An Empirical Study on Impact of FII and Other Stock Exchanges Volatility on BSE Stock Exchange Volatility, International Journal of Engineering Technology, Management and Applied Sciences, Vol. 2, Issue 5, October, pp. 23–32.
Mukherjee Paramita, Bose Suchismita, Coondoo Dipankor (2002), Foreign Institutional Investment in the Indian Equity Market: An Analysis of Daily Flows during January 1999–May 2002, ICRA Bulletin Money & Finance, April–September 2002, pp. 21–51.
Rajput Namita, Chopra Parul, Rajput Ajay (2012), FII and Its Impact on Stock Market: A Study on Lead-Lag and Volatility Spillover, Asian Journal of Finance & Accounting, Vol. 4, No. 2, pp. 18–38.
Saxena Swami P., Bhadauriya Sonam (2011), FII Flows and Stock Market Volatility: Exploring Causal Link, Presentation at the International Conference on Practice and Research in Management, Department of Management, Dayalbagh Educational Institute, Dayalbagh, Agra (February), retrieved from:
http://ssrn.com/abstract=2063140
Singh Sandeep (2016), FII Inflow in 2016: Betting Big on the India Growth Story, retrieved from:
http://indianexpress.com/article/business/economy/fii-inflow-in-2016-betting-big-on-the-india-growth-story-2984092/
Vyas Devdatt J., Shah Manoj D. (2015), An Empirical Study on Foreign Institutional Investors' Investment Trends and Its Impact on BSE Sensex, International Journal of Management and Social Science Research Review, Vol. 1, Issue 14, August, pp. 321–328.

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Neetu Chadha, Balwinder Kaur . (2017). Dynamism of FII flows and Expected Volatility in Indian Stock Markets : An Empirical Analysis. DIAS Technology Review, 14(1), 46-52.

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[1] Aswini, Kumar Mayank (2014), Impact of FII on Stock Market in India, Global Journal of Finance and Management, Vol. 6, No. 8, pp. 765–770.

[2] Amihud Yakov (2002), Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, Journal of Financial Markets, Vol. 5, pp. 31–56.

[3] Anand Kshitij (2015), Top Five Factors which are Making Indian Stock Market Volatile, retrieved from:

[4] http://economictimes.indiatimes.com/articleshow/47279497.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[5] Chadha Neetu, Saxena Sakshi (2014), Co-Movements of and Linkages between NSE and NYSE, DIAS Technology Review, Vol. 11, No. 1, April–September, pp. 8–15.

[6] Chakraborty Tanupa (2007), Foreign Institutional Investment Flows and Indian Stock Market Returns: A Cause and Effect Relationship Study, Indian Accounting Review, Vol. 11, No. 1, June, pp. 35–48.

[7] Coondoo Dipankar, Mukherjee Paramita (2004), Volatility of FII in India, ICRA Bulletin Money & Finance, Oct 2003–March 2004, pp. 85–102.

[8] De Suddhasanta, Chakrabarty Tanupa (2016), FII Flow and Volatility Expectations in Indian Equity Markets, The IUP Journal of Applied Finance, Vol. 22, No. 1 (January), pp. 5–15.

[9] Foreign Institutional Investors (2016), retrieved from:

[10] https://www.ibef.org/economy/foreign-institutional-investors.aspx

[11] Joo Bashir Ahmad, Mir Zahoor Ahmad (2014), Impact of FIIs Investment on Volatility of Indian Stock Market: An Empirical Investigation, Journal of Business & Economic Policy, Vol. 1, No. 2 (December), pp. 106–114.

[12] Kaur Balwinder (2016), Effect of Mutual Funds (MFs) Investments and Foreign Institutional Investors (FIIs) Investments on the Indian Stock Market: An Empirical Analysis, DIAS Technology Review, Vol. 13, No. 1, April–September.

[13] Kumar Rakesh, Gautam Sarita (2014), An Empirical Study on Impact of FII and Other Stock Exchanges Volatility on BSE Stock Exchange Volatility, International Journal of Engineering Technology, Management and Applied Sciences, Vol. 2, Issue 5, October, pp. 23–32.

[14] Mukherjee Paramita, Bose Suchismita, Coondoo Dipankor (2002), Foreign Institutional Investment in the Indian Equity Market: An Analysis of Daily Flows during January 1999–May 2002, ICRA Bulletin Money & Finance, April–September 2002, pp. 21–51.

[15] Rajput Namita, Chopra Parul, Rajput Ajay (2012), FII and Its Impact on Stock Market: A Study on Lead-Lag and Volatility Spillover, Asian Journal of Finance & Accounting, Vol. 4, No. 2, pp. 18–38.

[16] Saxena Swami P., Bhadauriya Sonam (2011), FII Flows and Stock Market Volatility: Exploring Causal Link, Presentation at the International Conference on Practice and Research in Management, Department of Management, Dayalbagh Educational Institute, Dayalbagh, Agra (February), retrieved from:

[17] http://ssrn.com/abstract=2063140

[18] Singh Sandeep (2016), FII Inflow in 2016: Betting Big on the India Growth Story, retrieved from:

[19] http://indianexpress.com/article/business/economy/fii-inflow-in-2016-betting-big-on-the-india-growth-story-2984092/

[20] Vyas Devdatt J., Shah Manoj D. (2015), An Empirical Study on Foreign Institutional Investors' Investment Trends and Its Impact on BSE Sensex, International Journal of Management and Social Science Research Review, Vol. 1, Issue 14, August, pp. 321–328.