Trading Behaviour of Foreign Institutional Investors: Evidence from Indian Stock Markets

Abstract

The existence of behavioural bias such as positive feedback trading (PFT) and herding is well researched for advanced economies. This paper explores whether foreign institutional investors (FIIs), a prominent investor group, pursue these strategies in India. The contribution lies in the application of multiple measures of herding. Results indicate that FIIs exhibit PFT behaviour in equity and to some extent, in debt. At the individual stock level, FIIs herd during non-extreme market conditions, but market-level measures indicate absence of herding in extreme market conditions. In the bullish market, they behave more rationally compared to bearish or normal market conditions.

Feedback Trading and Its Implications for Return Autocorrelations in India During COVID

“…This implies that FIIs are engaged in PFT for the entire sample period, while DIIs are mainly negative feedback traders. This is in line with the findings by Kadanda and Raj (2017), Chauhan and Chaklader (2020), and Mukherjee and Tiwari (2022), among others.…”

“…Mukherjee et al (2002) find that FIIs in India pursue feedback trading, and market returns are not influenced by their investments. Other studies find the existence of momentum or PFT by FIIs in emerging markets (e.g., Chauhan & Chaklader, 2020; Mukherjee & Tiwari, 2022, in India; Richards, 2004, in six Asian emerging markets; Choe et al, 1999, in Korea, etc. ).…”