The Causal Relationships in Mean and Variance between Stock Returns and Foreign Institutional Investment in India

Discussion Papers


by INOUE Takeshi

November 2008


This paper examines the causalities in mean and variance between stock returns and Foreign Institutional Investment (FII) in India. The analysis in this paper applies the Cross Correlation Function approach from Cheung and Ng (1996), and uses daily data for the timeframe of January 1999 to March 2008 divided into two periods before and after May 2003. Empirical results showed that there are uni-directional causalities in mean and variance from stock returns to FII flows irrelevant of the sample periods, while the reverse causalities in mean and variance are only found in the period beginning with 2003. These results point to FII flows having exerted an impact on the movement of Indian stock prices during the more recent period.

Keywords: causality, cross correlation, foreign institutional investment, India, stock price
JEL classification: E44, F21

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