Foreign portfolio flows and emerging stock market: Is the midnight bell ringing in India?

Hiremath, Gourishankar S.; Kattuman, Paul

doi:10.1016/j.ribaf.2017.04.016

Cited by 17 publications

(12 citation statements)

References 50 publications

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“…Our findings also support the positive feedback trading strategies often associated with foreign investors. This corroborates with evidence found for selected emerging market economies (Froot et al , 2001; Richards, 2005), Japan (Karolyi, 2002), India (Thiripalraju and Acharya, 2011; Hiremath and Kattuman, 2017), but contrasts with the findings for Turkey (Ülkü and İkizlerli, 2012) and some emerging European markets (Ülkü, 2015).…”

Section: Relationship Between the Stock Market And Foreign Institutio...supporting

confidence: 88%

What do foreign flows tell us about stock market movements in the presence of permanent and transitory shocks?

Marfatia¹

2021

SEF

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Purpose There is no research on understanding the difference in the nature of volatility and what it entails for the underlying relationship between foreign institutional investors (FII) flows and stock market movements. The purpose of this paper is to explore how permanent and transitory shocks dominate the common movement between FII flows and the stock market returns. As emerging markets are a major destination of international portfolio investments, the author uses India as a perfect case study to this end. Design/methodology/approach The paper uses the permanent-transitory as well as a trend-cycle decomposition approach to gain further insights into the common movement between foreign institutional investors (FII) flows and the stock market. Findings When the author identifies innovations based on their degree of persistence, transitory shocks dominate stock returns, whereas permanent shocks explain movements in foreign institutional investors (FII) flows. Also, stock returns have a larger cyclical component compared to cycles in foreign flows. The authors find the sharp downward (upward) movement in the stock market (FII flows) cycle in the initial period of the COIVD-19 pandemic was quickly reversed and currently, the stock market (FII flows) is historically above (below) the long-term trend, hinting at a correction in months ahead. The authors find strikingly similar stock market cycles during the global financial crisis and COVID-19 period. Research limitations/implications Evidence suggests the presence of long stock market cycles – substantial and persistent deviations of actual price from its fundamental (trend) value determined by the shared relationship with foreign flows. This refutes the efficient market hypothesis and makes a case favoring diversification gains from investing in India. Further, transitory shocks dominate the forecast error of stock market movements. Thus, the Indian market provides profit opportunities to foreign investors who use a momentum-based strategy. The author also finds support for the positive feedback trading strategy used by foreign investors. Practical implications There is a need for policymakers to account for the foreign undercurrents while formulating economic policies, given the findings that it is the permanent shocks that mostly explain movements in foreign institutional flows. Further, the author finds only stock markets error-correct in response to any short-term shocks to the shared long-term relationship, highlighting the disruptive (though transitory) role of FII flows. Originality/value Unlike existing studies, the author models the relationship between stock market returns and foreign institutional investors (FII) flows by distinguishing between the permanent and transitory movements in these two variables. Ignoring this distinction, as done in existing literature, can affect the soundness of the estimated parameter that captures the nexus between these two variables. In addition, while it may be common to find that stock market returns and FII flows move together, the paper further contributes by decomposing each variable into a trend and a cycle using this shared relationship. The paper also contributes to understanding the impact of COVID-19 on this relationship.

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Section: Relationship Between the Stock Market And Foreign Institutio...supporting

confidence: 88%

What do foreign flows tell us about stock market movements in the presence of permanent and transitory shocks?

Marfatia¹

2021

SEF

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“…More recent studies also find evidence of PFT for FIIs (e.g. Kadanda & Krishna, 2017 ) based on data spanning the year 2014, Naik and Padhi ( 2016 ) based on data from 2002 to 2012, Arora ( 2016 ) based on data from 2007 to 2013, and Hiremath and Kattuman ( 2017 ) based on data from 1999 to 2014).…”

Section: Literature Reviewmentioning

confidence: 91%

Trading Behaviour of Foreign Institutional Investors: Evidence from Indian Stock Markets

Mukherjee

Tiwari

2022

Asia-Pac Financ Markets

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The existence of behavioural bias such as positive feedback trading (PFT) and herding is well researched for advanced economies. This paper explores whether foreign institutional investors (FIIs), a prominent investor group, pursue these strategies in India. The contribution lies in the application of multiple measures of herding. Results indicate that FIIs exhibit PFT behaviour in equity and to some extent, in debt. At the individual stock level, FIIs herd during non-extreme market conditions, but market-level measures indicate absence of herding in extreme market conditions. In the bullish market, they behave more rationally compared to bearish or normal market conditions.

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“…We used a rolling window size of 500 observations 4 with each five observation forward shifting points to identify the short-lived predictability in the stock return series. Similar window size has been adopted by several authors (Charles et al 2012;Dyakova and Smith 2013;Hiremath and Kattuman 2017;Khuntia and Pattanayak 2019). Besides, the simulation results of Charles et al (2011) show that the window size which we considered has no size distortion and therefore hold better power properties.…”

Section: Rolling Window Analysismentioning

confidence: 83%

“…The previous research has considered the window size of one year (Sukpitak and Hengpunya 2016), three months (Mirzaee Ghazani and Khalili Araghi 2014), and 500 observations or about two years (Khuntia and Pattanayak 2019). In this context, Hiremath and Kattuman (2017) suggest that the length of the window size should have enough number of observations to capture the size and power properties of the time series methods. Therefore, the choice of rolling window size remains inconclusive and differs based on the diversified properties of several methodologies.…”

Section: Rolling Window Analysismentioning

confidence: 99%

Market Adaptability and Evolving Predictability of Stock Returns: An Evidence from India

Bhuyan

Patra

Bhuian

2020

Asia-Pac Financ Markets

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This study attempts to examine the adaptive market hypothesis and evolving predictability of stock returns using four decades of daily data from the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. The recent developed automatic portmanteau ratio (AVR) and wild bootstrap automatic variance ratio (WAVR) test are used for analysis. We also estimate both the AVR and WAVR statistics in the rolling window framework to examine evolving predictability. The results revealed that BSE and NSE are informationally inefficient in the weakform. The results of rolling window analysis suggested that the degree of predictable patterns evolves over the period due to global and regional economic and noneconomic events. Further, the study compare which stock market is more efficient and found that NSE is more efficient than BSE. The findings of this study provide essential inputs to investors on trading strategies in dynamic economic situations and policymakers to formulate an appropriate policy that can make the Indian stock markets efficient.

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Foreign portfolio flows and emerging stock market: Is the midnight bell ringing in India?

Cited by 17 publications

References 50 publications

What do foreign flows tell us about stock market movements in the presence of permanent and transitory shocks?

What do foreign flows tell us about stock market movements in the presence of permanent and transitory shocks?

Trading Behaviour of Foreign Institutional Investors: Evidence from Indian Stock Markets

Market Adaptability and Evolving Predictability of Stock Returns: An Evidence from India

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