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Book cover: International Finance Review

International Finance Review

ISSN: 1569-3767
Series editor(s): Professor J. Jay Choi

Subject Area: Accounting and Finance

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Do Foreign Institutional Investors (FIIs) Exhibit Herding and Positive Feedback Trading in Indian Stock Markets?


Document Information:
Title:Do Foreign Institutional Investors (FIIs) Exhibit Herding and Positive Feedback Trading in Indian Stock Markets?
Author(s):Mangesh Tayde, S.V.D. Nageswara Rao
Volume:12 Editor(s): Narjess Boubakri, Jean-Claude Cosset ISBN: 978-1-78052-242-5 eISBN: 978-1-78052-243-2
Citation:Mangesh Tayde, S.V.D. Nageswara Rao (2011), Do Foreign Institutional Investors (FIIs) Exhibit Herding and Positive Feedback Trading in Indian Stock Markets?, in Narjess Boubakri, Jean-Claude Cosset (ed.) Institutional Investors in Global Capital Markets (International Finance Review, Volume 12), Emerald Group Publishing Limited, pp.169-185
DOI:10.1108/S1569-3767(2011)0000012009 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Article type:Chapter Item
Abstract:

Purpose – The aggregate investment by foreign institutional investors (FIIs) in the Indian stock market is significant compared to that by domestic institutions and individual (retail) investors. The question of whether FIIs exhibit herding and positive feedback trading while investing in the Indian stock markets has not been examined so far. This study is an attempt to fill the gap and contribute to the existing evidence on foreign portfolio investment in India.

Methodology/approach – We have analyzed the daily data on purchases and sales of securities by FIIs sourced from the Securities and Exchange Board of India (SEBI), and the Bombay Stock Exchange (BSE). We have adopted the approach of Lakonishok et al. (1992), and Wermers (1999) to examine herding and positive feedback trading by foreign investors.

Findings – Our results suggest that FIIs exhibit herding and positive feedback trading during different phases of the stock market. This observed behavior is prominent in but not restricted to large cap stocks as they enjoy better liquidity.

Social implication – The herding and positive feedback trading by FIIs is a cause for concern for government of India, capital market regulator (SEBI), and the country's central bank (RBI) as it adversely affects stock prices and volatility. They are required to formulate and implement a suitable policy response given their objective of protecting the interests of small investors in the market. They may also have to monitor the purchases and sales of equities by FIIs in general and of better performing large cap stocks in particular.


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