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

Abstract

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.