Causal relationships between Foreign Institutional Investments and stock returns in India

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.