Interaction of institutional investment activity and stock market volatility: evidence from India created by Pramod Kumar Naik and Puja Padhi

This study examines the dynamic interaction of institutional fund flows and stock returns volatility using daily data. Foreign institutional investors (FIIs) and mutual funds’ net equity investment have been considered simultaneously using the vector auto-regression (VAR) model. The findings show that both mutual funds’ as well as FIIs’ net investment on equity jointly influences the stock market. While the mutual funds’ net investments positively influence stock market volatility, the FIIs’ net investments negatively impact volatility. However, in the presence of market fundamentals, it is found that FII’s net flow does not show significant influence on market volatility, but mutual funds net flow has a significant impact on market volatility at least at the second lags. It has also been observed that the investment activities of FIIs and mutual funds are interrelated. Causality test indicates that there exists a bidirectional causation between FII’s net flow and market volatility, whereas mutual funds flows do not cause volatility.