Title: Domestic institutional investments in India: an empirical analysis of dynamic interactions with stock market returns and volatility

Authors: Shivam Saxena; Chandrima Sikdar

Addresses: School of Business Management, NMIMS University, V.L. Mehta Road, Vile Parle (West), Mumbai – 400056, India ' School of Business Management, NMIMS University, V.L. Mehta Road, Vile Parle (West), Mumbai – 400056, India

Abstract: The paper attempts an investigation of dynamic interrelations between domestic institutional investment (DII) flows and stock market returns and volatility in India. The analysis based on vector autoregression framework provides evidence of marginal impact of flows on market returns, but significant impact of returns on DII flows. Returns are found to impact inflows and net flows negatively and outflows positively, implying negative feedback trading behaviour of investors. Relationship between DII flows and return volatility too testify this behaviour. Mutual funds are found to be the active DII component dominating the direction of causality. However, recent years have witnessed rising participation and impact on returns from DIIs by pension funds, insurance companies and banks and financial institutions. The paper confirms evidence from existing literature that rising DIIs can bring down volatility in the Indian stock market and establishes the rising impact of DII net flows on market returns in recent years.

Keywords: domestic institutional investment; mutual funds; India; stock market; returns; volatility; dynamic interaction; causality; vector autoregression; feedback trading.

DOI: 10.1504/GBER.2024.140242

Global Business and Economics Review, 2024 Vol.31 No.2, pp.230 - 258

Received: 03 Sep 2022
Accepted: 17 Feb 2023
Published online: 31 Jul 2024 *

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