Dynamics of Association between Indian Stock Market and Institutional Investors in the Long Run and Short Run- A Study of Bse Sensex

Institutional investors have gained a remarkable role in the Indian stock market. In this Research paper, the trading behaviour of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) has been investigated in relation to Indian stock market returns as proxied by BSE Sensex. The present study uses a wider description of DIIs by including not only mutual funds (MFs) but also other domestic financial institutions, banks and insurance companies who are active in the Indian stock market. The major objective of the study was to elucidate the existence of short-term and long-term causal relationship between the Foreign Institutional Investors Domestic Institutional Investors and the Indian stock market. The empirical techniques such as co-integration and Block Exogenity Wald Test as a part of research methodology have been employedfor the purpose of data analysis. Further the error correction term of Vector Error Correction Model (VECM) specifies the existence of long-run causal relationship. The Johansen's cointegration test results confirmed the presence of long term relationship between Institutional Investors and stock market indices. The studyrevealed that the investments by FIIs and Indian stock market as proxied by BSE are adjusting variables in the long run and no long term relationship was found in case of DIIs. However, the analysis of short term relationship indicated that the Indian stock Market is significantly influenced by the Foreign Institutional Investors and that the Domestic Institutional Investors are influenced by the Indian Stock Market.