In earlier studies, efforts have been made by many researchers to forecast volatility in the emerging stock markets and found that FIIs investment has a significant impact on volatility in the stock markets of emerging economies. Samal (1997), argued that the main emerging feature of India’s equity market since 1991 is its gradual integration with global market and problem faced due to capital movement by foreigninstitutionalinvestors. The FIIs are manipulating equity market and equity price movement is greatly influenced by them, thus leading to greater volatility.
Recent research has also shown that rising institutional ownership has contributed to both increased trading liquidity and corporate governance reforms in Indian companies. However, our understanding of investment in emerging markets by Indian institutionalinvestors is quite limited. The objective of this paper is to provide a better understanding of the preferences of foreigninstitutionalinvestors as revealed by their portfolio holdings in emerging market equities. We analyze portfolio holdings of FIIs with respect to countries, equity markets, and firms that they invest in.
The Indian government has recognized the eminent role of the ForeignInstitutionalInvestors (FII) in its process of economic development, not only as a domestic capital but also as an important source of technology and other global trade practices. To attract the required amount of FII, it has bought about the number of changes in its economic policies has put in its practice a liberal and more transparent FII policy with a view to attract more foreign direct institutional investments inflow in to its economy.
Though India receives hardly 1 percent of the FII investments in emerging markets v , the portfolio flows to India have been less volatile when compared with that of many other emerging markets (Gordan and Gupta, 2003). FIIs by adopting a bottom-up approach seem to invest in top-quality, high growth, large cap stocks (Gordan and Gupta, 2003). Sytse et al. (2003) provide empirical evidence that foreigninstitutionalinvestors in India, invest in large, liquid companies which enable them to exit their positions quickly at relatively lower cost and also that the foreigninstitutional owners have a larger impact than foreign corporate owners when performance is measured using stock market valuation criterion.
Recent years have witnessed growing foreign portfolio investments into emerging equity markets, potentially driven by reduced restrictions in capital mobility and improved information flow. Yet, only a few dimensions of foreign portfolio investments have been examined. One particular strand of literature investigates the investment preferences and performances of foreigninstitutionalinvestors relative to domestic investors. For example, Ferreira and Matos (2008) show that while domestic institutionalinvestors (DIIs henceforth) and foreigninstitutionalinvestors (FIIs henceforth) share some common investment preferences, they also exhibit substantial differences. Some studies also document that FIIs exhibit superior performance relative to DIIs on account of their investment experience and expertise (see Grinblatt and Keloharju, 2000; Seasholes, 2000). On the other hand, Kang and Stulz (1997) and Choe et al. (2005) suggest that DIIs perform far better than FIIs, especially because of their informational advantage in the home markets. These findings are, however, based on the analysis of investments in secondary equity markets. No study, to our knowledge, has compared the investment patterns of DIIs and FIIs at the time of initial public offerings (IPOs). This distinction is important because investors are likely to have access to more information in secondary markets (particularly due to mandatory disclosure requirements, analysts’ coverage, and the wider investor-base of listed firms) than in IPO markets. This paper aims to fill the void in the literature by comparing the investment patterns of FIIs and DIIs in IPO markets.
There has been dramatic growth in foreigninstitutional investment in global capital markets over the past few decades (Karolyi, 2006). Researchers have so far focused on the monitoring role played by foreigninstitutionalinvestors in firms in which they invest. For example, foreigninstitutionalinvestors are credited with promoting domestic firms ’ corporate governance (Gillan and Starks, 2003). Foreigninstitutionalinvestors play a more active monitoring role than domestic institutionalinvestors, because foreigninstitutionalinvestors are less likely to seek business relationships with local firms (Ferreira and Matos, 2008). Aggarwal et al. (2011) find a positive relation between foreigninstitutional ownership and firm-level governance efficacy. However, an unexplored but equally important question is whether foreigninstitutionalinvestors play an informational role in influencing firms’ information environment. To fill this gap, we investigate whether foreigninstitutionalinvestors facilitate firm-specific information flows in the global market, thereby mitigating excess stock return comovements.
Stock markets in China have come a long way since the first market liberalisation in the early 1990’s and the introduction of the Qualified ForeignInstitutionalInvestors scheme has taken it further. Despite China being amongst the largest world equity markets it must still be approached with caution, particularly as country-level protections for investors is poor. Analysis of synchronicity provides a useful tool for understanding the workings of the Chinese stock market. Stock price synchronicity is shown to decline as the level of foreign investment increases in individual firms. Although this is not a new finding the use of QFII data provides a more reliable method for measuring the level foreign investment in individual firms. Testing of the use of a Big 4 auditor is still found to be significant (10% level) but this is weaker than in previous studies such as Gul et al. (2010) which uses data predating the introduction of the QFII scheme. These results help us to more clearly understand how firm-level protection for investors has an impact on disclosing firm-specific information to outside investors. Despite over 20 years’ development there is still a long way to go for policy makers to ensure an informational efficiency equity market in China.
With the emerging market crises of the late 1990s, the role of Foreign Portfolio Investment (FPI) and the major players therein i.e. the foreigninstitutionalinvestors (FIIs) has come under intense scrutiny by academics as well as policymakers. A general perception about the FIIs is that they are speculators and their investment is motivated by short- term gains. The FIIs in pursuit of short- term gains adopt short- term trading strategies such as positive feedback trading and herding (i.e. buy or sell stocks together as a group). Such behavioral biases of FIIs, it is believed, may lead to price overreaction and contribute to the creation or exacerbation of a financial crisis.
studied daily FII flows from January 1999 to May 2002. They found that FII movements are caused by the return in the domestic market and not the other way round. There are number of studies that have investigated various aspect of foreigninstitutionalinvestors in Indian capital market. This background highlights the importance of foreign capital flows and demand for further study to understand the trading behavior of foreign capital flows in India. Considering this background, it is necessary to study the dynamics of the foreigninstitutional investment flows and Indian market returns. Srinivasan and Bhat, (2009) also emphasized that India is an important emerging Asian economy, where the market liberalization steps are being taken regularly. It makes India lucrative destination for foreigninstitutionalinvestors. The study of Samarakoon (2009), using Bivariate VAR, found in the Sri Lankan market that purchases as well as sales of domestic and foreigninvestors are positively linked with past returns signifying that investors exhibits positive feedback trading in foreign inflow and contrarian trading behavior in foreign outflow. However, the behavior of foreigninvestors reverses in the times of crisis. The investors demonstrate negative feedback trading in buying trades and momentum trading in selling. This study attempts to investigate dynamic impact of foreigninstitutionalinvestors on market return. This paper endeavors to analyze the relationship between foreigninstitutionalinvestors and market returns in dynamic setting using bivariate vector autoregression (BVAR) model.
It was in 1992 India has opened up its economy and allowed Foreign Portfolio Investment (FPI) in its domestic stock markets. Since then, FPI has emerged as a major source of private capital inflow in this country. An important feature of the development of stock market in India in the last 19 years has been the growing participation of InstitutionalInvestors, both foreigninstitutionalinvestors and the Indian mutual funds combined together, the total assets under their management amounts to almost 18% of the entire market capitalization.
The monthly data for a time period of 15 years from January 1993 to August 2007 were used to measure the impact of FIIs on trading volume and market capitalization. The data of the Trading Volume and market capitalization have been taken from the website of the Reserve Bank of India. The impact of foreigninstitutionalinvestors purchases and sales of the securities at BSE Ltd. on the market capitalization and trading volume has also examined. For this purpose we have taken the monthly data of the purchase and sale of the securities for the same time period. India witnessed multi-billion rupee stock market scam in March 2001, which led to a freeze on the flagship scheme of Indian largest mutual fund (Unit Trust of India) in June 2001. Resultantly, the market witnessed a considerable decline in trading volume at stock market. This abnormality could prompt any researcher to remove outlier and then measure the impact of FII investments on trading volume of Indian stock market. So we have ignored the time period from March 2001 to June 2001 in the calculation of the impact of foreigninstitutional investor investments on the Indian stock market trading volume and market capitalization. However, it is not denied that stock market scams are results of system failure and hence these may recur. Therefore, any robust volatility model should be able to capture this phenomenon and hence we have not removed these extreme observations from our sample while analyzing the stock market volatility.
ForeignInstitutionalInvestors (FIIs) were permitted to invest in all the listed securities traded in Indian capital market for the first time in September, 1992. As per the RBI, Report on Currency & Finance (2003-04), since 1991 there has been continuous move towards the integration of the Indian economy with world economy. Since then the regulations with regard to FIIs investment has become more liberal. As a result of abolishment of barriers to capital inflows in the form of FIIs investment, India attracted huge amount of foreign capital particularly from developed countries. The cumulative net investment by FIIs in Indian stock market since 1993 has crossed US$ 50 billion at the end of March 2007, (SEBI, annual report, 2006-07). International capital inflows have both positive as well as negative impact on the health of the recipient economy. On the positive side, these capital inflows raise the level of economic development by augmenting the domestic investment and widen financial intermediation. But these capital inflows also pose several threats to the domestic economic and financial system of the recipient economy like inflation, appreciation in exchange rate, overheating of the economy and possibility of sudden withdrawal. FIIs investment is volatile by nature and is often termed as ‘hot money’. The hot money character of FIIs investment adds to the possibilities of ‘contagion’. 1 In the present paper, an effort has been made to estimate the determinants of foreign portfolio investment in India. In the light of huge and growing FIIs investment inflows to India, appropriate policy formulation is the need of the hour which will help in reducing the impact of possible threats and maximizing the benefits from the same to enhance economic and financial development. This in turn calls for the need to estimate the determinants of FIIs investment. Available empirical evidence suggests that FIIs inflows by and large are determined by the performance of stock markets and macroeconomic aggregates of the host country. Thus, FIIs investment is pulled toward an economy with sound macroeconomic factors, high returns, lesser risk and growing stock markets in terms of rising market capitalization and turnover. FIIs, give due consideration to risk-return characteristics in the home (source) country while investing in emerging markets. The profit booking tendency of FIIs depends on the difference in the home country risk-return and host country risk- return. Besides this, official policies of the host and home country i.e. degree of financial liberalisation, also determine the size of FIIs inflows.
When investors who have same interest to invest in foreign company, they create the company and start to invest in foreign companies. In India, SEBI defines all these investors as FIIs. Developing countries like India are ge nerally capital scarce. This is because of low levels of income in comparison to other developed countries, which in turn means savings and investments are also lower. So how do developing nations get out of such a situation? Simple! They borrow money. Countries can thus invest this borrowed money in various social and physical infrastructures, earn a return on them which helps them pay off their debt and simultaneously boost the country to a higher growth trajectory.
The negative co-efficient correlation has been found between FII and DII investing pattern. It means that when FII has invested into the market, then DII probably has withdrawn the funds from the market and vice versa. The co-efficient of correlation has been reveal negative (-0.36) between Nifty 50 index and FII inflows. On the other hand, co-efficient of correlation has been reveal positive (0.539) between index nifty 50 and DII inflows. It concluded that foreigninstitutional institutions have negative behavior and domestic institutional institutions have positive behavior towards Indian stock market. The finding of this study is also supported with the finding of study made by Jalota (2017).
The above findings substantiate the idea that herding may be related to limited information. Because the information structure, trading strategies, investments rules, and sociocultural background of foreigninstitutionalinvestors are different from those of domestic investors, the herding behavior of the former type of investor may differ from that of the latter. Shiller et al. (1996) provide additional evidence that expectations about market returns differ vary significantly between the United States and Japan. They find that the Japanese were uniformly more optimistic in their short-turn expectations for the stock market than were the Americans. This suggests that geographic location or country of origin may play some role in information acquisition and in beliefs about different countries’ returns. Dahlquist and Robertson (2001) posit that because foreigninstitutionalinvestors do not understand local stock markets as well as local investors do, the former tend to mirror one another regarding which stocks they trade or hold. Similarly, Scharfstein and Stein (1990) argue that investors may herd if they have access only to limited information resources. Hence, the findings of institutionalinvestors’ stronger herding behavior in emerging markets than in mature markets (Lobao and Serra, 2002; Voronkova and Bohl, 2005; Tan et al., 2008), implies that the soundness of markets may also influence institutionalinvestors’ herding behavior.
With the advent of globalisation, there have been massive ForeignInstitutional Investment (FII) flows into emerging equity markets like India during the past two decades. Foreign equity investment is widely viewed as one of the principal vehicles for obtaining the capital easier by the start-up companies as well as existing companies. The foreigninvestors participation also increases the liquidity of local markets, makes the base of investor broader, increases risk sharing, and thus lowers the cost of capital for investment. Further, the foreigninvestors demand for higher investment leads to better rules and regulations in local markets. These rules primarily relate to information quality and higher accounting standards (Evans, 2002). Hence, financial markets become more transparent by the participation of foreigners, leading to better allocation of resources and healthier financial markets. The foreigninstitutionalinvestors may smoothen or stabilise the local stock markets if they tend to follow contrarian or negative feedback trading strategies i.e., investors buy when prices are low and sell after prices increase. Conversely, the foreign portfolio flows may exert a destabilising influence on emerging market economies. Dornbusch and Park (1995) argued that foreigninvestors pursue positive feedback trading strategies that make stock price overreact to changes in fundamentals and such trading strategies may cause bubbles and crashes in local markets. By positive feedback trading is meant the practice of buying shares as prices move up and selling them as prices come down. Thus, the positive feedback trading hypothesis reveals that foreigninstitutional agencies make investments in the market in response to the increasing returns. Moreover, the foreigninstitutional investment flows may be driven by changes in investor sentiment unrelated to fundamentals, causing local prices to rise or fall. Prices exhibit reversal after such pressure has subsided.
In this article, we investigated the foreign fund’s movement in the stock market and its effect on the stock market return and the change in regime switching. First, we characterized the bull and bear market states in the Qatari Market to compare it with the other stock markets which have been previously studied. The empirical results show that the bull state in the Qatari Market has long run positive mean and low variance, while the bear state have a short run negative mean with high variance. So our results support the previous literature review. In the second part of the study, we tried to investigate if the foreign investor inters the market in order to only herding with the market trends while he has not the ability to switch the regime of the market or he has the full ability to push the market up and down, and change the trend of the market. We proposed a new adaptation of Hamilton (1989) to measure herding in the market and the ability to switch the market state (bull or bear). The model was divided into two parts. In the first part, we included the investor types' variable in the Hamilton (1989) model as an independent factor which measures the herding behavior of each investor type. The second part has considered TVTP in Markov-Switching model to measure the ability of the trader to shift the market form one state to another. We have found that, of the four investor categories, no one has full control of the market state switching. The unexpected surprise was that we found a significant negative relationship between the Qatari individual flows and the probability of persistence in the bull regime which means that Qatari individuals cannot predict the market trends; in other words they cannot time the market trends. We extended our analysis to examine the stability of the stability of the leadership position of the foreigninstitutional investor via investigating the time-varying correlations’ coefficients of the four investors’ categories with the Qatari stock market. The result concluded that, although the correlation matrixes of the various investors’ types are time-varying, the foreigninstitutionalinvestors still have the leadership position over the period of the study. Finally, we presented some recommendations which we think that it is important for the policy maker to prevent manipulating by foreigninstitutionalinvestors and by all manipulators at all. For the stock market to have more stability, we highly recommend for the Qatari Stock Authority to add some regulations regarding foreigninstitutionalinvestors.
portfolio, foreigninvestors increase their assessment of the expected payoff faster than better informed domestic investors do; as a result price rises to clear the market, and the less well informed foreigninvestors purchase more of the domestic market portfolio from the better informed domestic investors; the reverse occurs if the news is bad and the price fall (Brennan and Cao 1997). Usually foreigninstitutionalinvestors have access to both international expertise and talent and have considerable local resources. It is therefore not obvious that foreigninstitutionalinvestors should be at a disadvantage relative to domestic institutionalinvestors. Grinblatt and Keloharju (2000) and Seasholes (2000) even argue that as a result of their better access to expertise and talent, foreign institutions should be smarter than local institutions. Using daily data for the 16 largest Finnish stocks, Grinblatt and Keloharju (2000) find that over a two-year period foreigners and domestic financial corporations buy more stocks that perform well over the next 120 trading days than domestic individual investors, but their sample period is too short for them to conduct a study of holding period returns. Seasholes (2000) finds that foreigninvestors buy (sell) ahead of good (bad) earnings announcements in Taiwan while local investors do the opposite. These findings therefore, are consistent with better information and greater sophistication on the part of foreigninvestors. However, evidence on the performance of foreigninvestors is mixed. For instance, Kang and Stulz (1997) using annual data for 18 years find no evidence that foreigninvestors outperform domestic investors in Japan.
The liberalization policies initiated in India in the early 1990s brought about radical changes in the conduct of stock market. Rising globalization, deregulation, and foreign portfolio investments made the Indian stock exchanges competitive and efficient in their functioning. With the rise of equity culture across the globe, even India which has a long history of stock exchanges, has witnessed a perceptible shift in the proportion of investor‟s participation in equity markets. The role of investors is the key to success of market guided economic system and since it is they who pump their savings into the markets, their investments need to be channelized to the most rewarding sectors of the economy. One of the most dominant investors groups that has emerged to play a critical role in the overall performance of the capital market are ForeignInstitutionalInvestors (FIIs). Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country. After the opening up of the borders for capital movement these investments have grown in leaps and bounds. But it has varied effects across the countries. It can affect the factor productivity of the recipient country and can also affect the balance of payments. In developing countries there is a great need of foreign capital, not only to increase their productivity of labor but also helps to build the foreign exchange reserves to meet the trade deficits. Foreign investment provides a channel through which these countries can have access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign portfolio investment (FPI). Foreign direct investment involves direct production activities of medium to long-term nature. But the foreign portfolio investment is a short-term investment mostly in the financial markets and it consists of ForeignInstitutional Investment (FII).
Foreign direct investment (FDI) has become increasingly important in the developing world, During the past two decades, with a growing number of developing countries succeeding in attracting substantial and rising amounts of inward FDI. A typical characteristic of these developing and underdeveloped economies is the fact that these economies do not have the needed level of savings and income in order to meet the required level of investment needed to sustain the growth of the economy. In such cases, foreign direct investment plays an important role of bridging the gap between the available resources or funds and the required resources or funds. It plays an important role in the long-term development of a country not only as a source of capital but also for enhancing competitiveness of the domestic economy through transfer of technology, strengthening infrastructure, raising productivity and generating new employment opportunities. In India, FDI is considered as a developmental tool, which helps in achieving self- reliance in various sectors and in overall development of the economy. In India FDI inflow made its entry during the year 1991-92 with the aim to bring together the intended investment and the actual savings of the country. To pursue a growth of around 7 percent in the Gross Domestic Product of India, the net capital flows should increase by at least 28 to 30 percent on the whole. But the savings of the country stood only at 24 percent. The gap formed between intended investment and the actual savings of the country was lifted up by portfolio investments by ForeignInstitutionalInvestors, loans by foreign banks and other places, and foreign direct investments. Among these three forms of financial assistance, India prefers as well as possesses the maximum amount of Foreign Direct Investments. Hence FDI is considered as a developmental tool for growth and development of the country. Therefore, this study is undertaken to analyze the flow of FDI into the country identifying the various set of factors which determine the flow of FDI.