Dynamic Interaction between Institutional Investment and Stock Returns in India: A Case of Flis and MFs

Abstract

This paper investigates the interaction between institutional investment and market return in Indian stock market. We have used daily net investment data of Foreign Institutional Investors (Flis) and Mutual Funds (MFs) from January 2000 to December 2009. Empirical result has shown that FU investment is positively related to lagged market return whereas MFs investment is negatively related to lagged market return. Bi- directional causality is found between FILS investment and market return whereas in the case of MFs only market return causes the investment. Impulse response analysis confirms that impact of shock to market return is more lasting on institutional investment than other way round. Sub- period analysis confirms that relationship between Fils flows and market return did not change significantly during the study period in comparison with MFs.