Title: Spillover effects of foreign institutional investments in India

Authors: Harendra Kumar Behera

Addresses: Monetary Policy Department, Reserve Bank of India, Central Office Building, Mumbai 400001, India

Abstract: This paper examines the relationship between investments by foreign institutional investors (FIIs) and financial markets in India. By using a bivariate asymmetric BEKK-GARCH (1, 1) model, we find that FII investments are largely driven by profit opportunities available in financial markets. Granger causality-in-mean test results also validate these findings. Estimates from variance equation and Granger causality-in-variance tests provide the evidence of volatility spillover from FII investments to stock market and forex market. The results show the presence of volatility transmission from exchange rate movements to FII activity. However, we did not find any causality-in-variance from stock market to FII investments. The sub-sample analyses suggest an increase in volatility spillover from FII activity to financial markets in India during the post global financial crisis period.

Keywords: foreign institutional investment; multivariate GARCH; volatility spillover; Granger causality-in-variance; financial market; forex market; India.

DOI: 10.1504/IJBD.2017.084922

International Journal of Bonds and Derivatives, 2017 Vol.3 No.2, pp.132 - 152

Received: 19 Feb 2016
Accepted: 02 Jun 2016

Published online: 27 Jun 2017 *

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