Foreign institutional investors and market return volatility: Evidence from symmetric and asymmetric models

Abstract This paper empirically investigates the impact of foreign institutional investors on Indian market returns volatility using symmetric and asymmetric volatility models like Generalized Autoregressive Conditional Heteroscedasticity (GARCH) and Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) respectively. The study has been conducted on two samples using Nifty 50 returns and foreign institutional investors purchase, sale and net investment from the year 2000 in whole sample and from the year 2009 in sub sample on daily basis. The dummy variable is used for global financial crisis that has significantly increased the volatility of Nifty 50 returns. The study has found that foreign institutional investors reduce the volatility in Indian market in most of the cases while net investment by foreign institutional investors increase the volatility of Indian markets. Furthermore, the study has surpassed previous studies by employing symmetric and asymmetric models on same sample of data and in observing that the outcome of this study is largely dependent on frequency of the data and selection of the methodology. The study suggested that there should be some capital control measures in short term and encourage long-term investment.