Title: Causal relationships between Foreign Institutional Investments and stock returns in India

Authors: M. Suresh Babu, K.P. Prabheesh

Addresses: Department of Humanities, Indian Institute of Technology Madras, Chennai-600036, India. ' Department of Humanities, Indian Institute of Technology Madras, Chennai-600036, India

Abstract: This paper examines the dynamic interaction between FII flows and stock market returns in Indian stock market. Using daily data from January 2003 to February 2007, VAR framework and Granger causality test, we find the existence of bidirectional causality between FII flows and stock returns. Further analysis through impulse response function indicates that FII flows are more stock return driven. We also find support for information revelation hypothesis and momentum trading hypothesis.

Keywords: FII flows; stock returns; VAR; Granger causality; information revelation hypothesis; momentum trading strategies; foreign institutional investments; Indian stock market; impulse response function.

DOI: 10.1504/IJTGM.2008.020430

International Journal of Trade and Global Markets, 2008 Vol.1 No.3, pp.259 - 265

Published online: 24 Sep 2008 *

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