BRM PROJECT

Page
1
“DOES FII’S
INCREASES
STOCK
MARKET
VOLATILITY”
Page
2
“DOES FII’S INCREASES STOCK MARKET VOLATILITY”

Section : A

Semester : 2

Batch : 2008-2010

STUDENT NAMES & ROLL NO:

AMRIT RANJAN SAHOO (6)

ANUBHAV GARG (9)
ANWAR HUSSAIN (10)
KARTIK SHETH (24)
PARTH MEHTA (35)
POONAM BAKSHI (37)
PREETISH SATHEESH (39)
ASHISH PUGALIA (40)
RAHUL KHANNA (42)
SHIVANI MAHESHWARI (52)
VIKASH JAIN (62)

Page
3
 ACKNOWLEDGEMENT

We would like to add a few heartfelt words for the people who were the part of this project
in numerous ways, the people who gave support right from the stage the project idea
was conceived.

Needless to say, this project would not have been possible without the blessings of the Almighty,
we are deeply indebted to our faculty Dr. Himani Joshi for her supporting nature, stimulating
suggestions and encouragement that helped us in all the time of research for and completing the
project.

We take this opportunity to convey our sincere thanks to Professor Mayank Patel and
Professor Suneel Arora for the kind co-operation and support extended to us during the whole
project tenure.

Last but not the least we are thankful to our family, friends and colleagues, who were the
constant source of inspiration throughout our project work.

Page
4
 TABLE OF CONTENTS

Cover Page 1

Title Page 2

Title, Section, Semester, Batch, Students Name and Roll No. Page 3

Acknowledgement Page 4

Table of Contents Page 5

Table of Appendices Page 6

Abstracts Page 7

Main Text Page 8 to Page 32

Current Scenario Page 33

Limitations Page 34

Learnings Page 35

Findings and Suggestions Page 36

Bibliography Page 37

TABLE OF APPENDICES

Model Summary and Parameter Estimates

(a Predictors: (Constant), quarterly outflow) Page 22
Model Summary and Parameter Estimates
(a Predictors: (Constant), quarterly inflow) Page 23

Page
5
 ABSTRACT

Since the beginning of liberalization Foreign Institutional Investor (FII) flows to India have
steadily grown in importance. Given the presence of foreign institutional investors in BSE
Sensex listed companies and their active trading behaviors, their role in determining share price
movements must be considerable. Investment by Foreign Institutional Investors in stock markets
surged past the 50-billion dollar on Nov 2007. This figure proves a phenomenal growth in FII
flows when compared to a mere USD 4 million in 1992-93 (the first year of allowing FII
participation in the Indian markets).

Indian stock markets are known to be narrow and shallow in the sense that there are few
companies whose shares are actively traded. Thus, although there are more than 4,700 companies
listed on the stock exchange, the BSE Sensex incorporates just 30 companies, trading in whose
shares is seen as indicative of market activity. In this project we will analyze the relationship
between FII Inflows and outflows and stock market volatility.

Page
6
Overview on Foreign Institutional Investor

Foreign Institutional Investor [FII] is used to denote an investor - mostly of the form of an
institution or entity, which invests money in the financial markets of a country different from the
one where in the institution or entity was originally incorporated.

India opened its stock markets to foreign investors in September 1992 and has, since 1993,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investor’s (FII) investment in equities. This has become one of the main channels of
international portfolio investment in India for foreigners. In order to trade in Indian equity
markets, foreign corporations need to register with the SEBI as Foreign Institutional Investors
(FII). SEBI's definition of FIIs presently includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management companies and other
money managers operating on their behalf.

The trickle of FII flows to India that began in January 1993 has gradually expanded to an
average monthly inflow of close to Rs. 1900 crores during the first six months of 2001. By June
2001, over 500 FIIs were registered with SEBI. The total amount of FII investment in India had
accumulated to a formidable sum of over Rs. 50,000 crores during this time. In terms of market
capitalization too, the share of FIIs has steadily climbed to about 9% of the total market
capitalization of BSE.

Page
7
Sources of FII in India:

The sources of these FII flows are varied. The FIIs registered with SEBI come from as many as
28 countries (including money management companies operating in India on behalf of foreign
investors). US-based institutions accounted for slightly over 41%, those from the UK constitute
about 20% with other Western European countries hosting another 17% of the FII‟s. It is,
however, instructive to bear in mind that these national affiliations do not necessarily mean that
the actual investor funds come from these particular countries. Given the significant financial
flows among the industrial countries, national affiliations are very rough indicators of the
"home” of the FII investments. In particular institutions operating from Luxembourg, Cayman
Islands or Channel Islands or even those based at Singapore or Hong Kong are likely to be
investing funds largely on behalf of residents in other countries. Nevertheless, the regional
breakdown of the FIIs does provide an idea of the relative importance of different regions of the
world in the FII flows.

Page
8
Page
9
Where can the investments be made?
Foreign corporate and foreign individuals are eligible to make investments only through the
equity route. The equity investment route permits upto 30% investments in debt instrument. At
least 70% of the investments has to be parked in equity related instruments which include
securities in primary and secondary markets (listed or unlisted), units of scheme floated by Unit
Trust of India and other domestic mutual funds (listed or unlisted), warrants and derivative
instruments. FIIs and the Sub-Accounts are permitted to tender their securities directly in
response to open offer made in terms of the SEBI (Substantial Acquisitions of Shares and
Takeovers) Regulations, 1997. FII and the Sub-Accounts are also permitted to offer their shares
in case of buyback of securities and also to lend securities through an approved intermediary.

Benefits and costs of FII investments

Benefits:

1) Reduced costs of equity capital- FII inflows augment the sources of funds in the Indian
capital markets. In a common sense way, the impact of FII‟s upon the cost of equity capital may
be visualized by asking what stock prices would be if there were no FIIs operating in India. FII
investment reduces the required rate of return for equity, enhances stock prices, and fosters
investment by Indian firms in the country.

2) Imparting stability to India's Balance of Payments- For promoting growth in a developing

country such as India, there is need to augment domestic investment, over and beyond domestic
saving, through capital flows. The excess of domestic investment over domestic savings result in
a current account deficit and this deficit is financed by capital flows in the balance of payments.
Prior to 1991, debt flows and official development assistance dominated these capital flows. This
mechanism of funding the current account deficit is widely believed to have played a role in the
emergence of balance of payments difficulties in 1981 and 1991. Portfolio flows in the equity
markets, and FDI, as opposed to debt-creating flows, are important as safer and more sustainable
mechanisms for funding the current account deficit.

Page
10
3) Knowledge flows- The activities of international institutional investors help strengthen Indian
finance. FIIs advocate modern ideas in market design, promote innovation, development of
sophisticated products such as financial derivatives, enhance competition in financial
intermediation, and lead to spillovers of human capital by exposing Indian participants to modern
financial techniques, and international best practices and systems.

4) Strengthening corporate governance- Domestic institutional and individual investors, used

as they are to the ongoing practices of Indian corporates, often accept such practices, even when
these do not measure up to the international benchmarks of best practices. FIIs, with their vast
experience with modern corporate governance practices, are less tolerant of malpractice by
corporate managers and owners (dominant shareholder). FII participation in domestic capital
markets often lead to vigorous advocacy of sound corporate governance practices, improved
efficiency and better shareholder value.

5) Improvements to market efficiency-A significant presence of FIIs in India can improve

market efficiency through two channels. First, when adverse macroeconomic news, such as a bad
monsoon, unsettles many domestic investors, it may be easier for a globally diversified portfolio
manager to be more dispassionate about India's prospects, and engage in stabilising trades.
Second, at the level of individual stocks and industries, FIIs may act as a channel through which
knowledge and ideas about valuation of a firm or an industry can more rapidly propagate into
India. For example, foreign investors were rapidly able to assess the potential of firms like
Infosys, which are primarily export-oriented, applying valuation principles that prevailed outside
India for software services companies.

Page
11
Costs:

1) Herding and positive feedback trading- There are concerns that foreign investors are
chronically ill-informed about India, and this lack of sound information may generate herding (a
large number of FII‟s buying or selling together) and positive feedback trading (buying after
positive returns, selling after negative returns). These kinds of behaviour can exacerbate
volatility, and push prices away from fair values. FIIs‟ behaviour in India, however, so far does
not exhibit these patterns

2) BOP vulnerability- There are concerns that in an extreme event, there can be a massive flight
of foreign capital out of India, triggering difficulties in the balance of payments front. India's
experience with FII‟s so far, however, suggests that across episodes like the Pokhran blasts, or
the 2001 stock market scandal, no capital flight has taken place. A billion or more of US dollars
of portfolio capital has never left India within the period of one month. When juxtaposed with
India's enormous current account and capital account flows, this suggests that there is little
evidence of vulnerability so far.

3) Possibility of taking over companies- While FII‟s are normally seen as pure portfolio
investors, without interest in control, portfolio investors can occasionally behave like FDI
investors, and seek control of companies that they have a substantial shareholding in. Such
outcomes, however, may not be inconsistent with India's quest for greater FDI. Furthermore,
SEBI's takeover code is in place, and has functioned fairly well, ensuring that all investors
benefit equally in the event of a takeover.

Page
12
Sensex & Nifty

Stock Exchanges are an organized marketplace, either corporation or mutual organization,

where members of the organization gather to trade company stocks or other securities. The
members may act either as agents for their customers, or as principals for their own accounts.

 The Sensex is an "index". An index is basically an indicator. It gives you a general idea
about whether most of the stocks have gone up or most of the stocks have gone down.
 The Sensex is an indicator of all the major companies of the BSE.
 The Nifty is an indicator of all the major companies of the NSE.
 If the Sensex goes up, it means that the prices of the stocks of most of the major
companies on the BSE have gone up. If the Sensex goes down, this tells you that the
stock price of most of the major stocks on the BSE have gone down.
 Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top
stocks of the NSE.
 The BSE, is the Bombay Stock Exchange and the NSE is the National Stock Exchange.
The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major
stock exchanges in the country. There are other stock exchanges like the Calcutta Stock
Exchange etc. but they are not as popular as the BSE and the NSE.Most of the stock
trading in the country is done though the BSE & the NSE.

Page
13
  Besides Sensex and the Nifty there are many other indexes. There is an index that gives
you an idea about whether the mid-cap stocks go up and down. This is called the “BSE
Mid-cap Index”. There are many other types of indexes.
 For our research we will be focusing on BSE Sensex and will use it as aproxy of NSE
because 99.99% of the time the FII impact on NSE will be same as on BSE. So we will
be comparing Sensex and FII net value ( comparision of FII inflow and outflow ). The
same will be a proxy for NSE too.

Factor affecting Sensex

 Fundamentals of the company

 Market sentiments

 Quarterly results

 Liquidity crunch

 Government policies

 Income and savings of investors

 News relating stocks

 Inflation

 Crude oil dynamics

 Technicality of the stock

 Profit made by companies

 Global positioning of company

 Fiscal measures

 CRR, SLR, PLR, Repo rates and interest rates

 Lending and borrowing mechanism of stocks

Page
14
Reasons for stock prices "up" and "down"
 Stock prices change every day because of market forces. By this we mean that stock
prices change because of “supply and demand”. If more people want to buy a stock
(demand) than sell it (supply), then the price moves up.
 Conversely, if more people wanted to sell a stock than buy it, there would be greater
supply than demand, and the price would fall.
 If a company's results are better than expected, the price jumps up. If a company's results
disappoint and are worse than expected, then the price will fall.
 For example, the stock price of dozens of internet companies rose without ever making
even the smallest profit. As we all know, these high stock prices did not hold, and most
internet companies saw their values shrink to a fraction of their highs. Still, this fact
demonstrates that there are factors other than current earnings that influence stocks.
 So , Some believe that it isn't possible to predict how stock prices will change, while
others think that by drawing charts and looking at past price movements, you can
determine when to buy and sell. The only thing we do know is that stocks are volatile and
can change in price very rapidly.

Calculation of BSE SENSEX:

SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the
level of index at any point of time reflects the free-float market value of 30 component stocks
relative to a base period. The market capitalization of a company is determined by multiplying
the price of its stock by the number of shares issued by the company. This market capitalization
is further multiplied by the free-float factor to determine the free-float market capitalization.
The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often
indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-
float market capitalization of 30 companies in the Index by a number called the Index Divisor.
The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index
comparable over time and is the adjustment point for all Index adjustments arising out of
corporate actions, replacement of scripts etc. During market hours, prices of the index scripts, at

Page
15
which latest trades are executed, are used by the trading system to calculate SENSEX every 15
seconds. The value of SENSEX is disseminated in real time.

VOLATILITY
Volatility most frequently refers to the standard deviation of the continuously compounded
returns of a financial instrument with a specific time horizon. It is often used to quantify the risk
of the instrument over that time period. Volatility is typically expressed in annualized terms, and
it may either be an absolute number ($5) or a fraction of the mean (5%). Volatility can be traded
directly in today's markets through options and variance swaps.

More broadly, volatility refers to the degree of (typically short-term) unpredictable change over
time of a certain variable. It may be measured via the standard deviation of a sample. Volatility
reflects the degree of risk faced by someone with exposure to that variable.

For securities, the higher the standard deviation, the greater the dispersion of returns and the
higher the risk associated with the investment. As described by modern portfolio theory (MPT),
volatility creates risk that is associated with the degree of dispersion of returns around the
average. In other words, the greater the chance of lower-than-expected return, the riskier the
investment. Another way to measure volatility is to take the average range for each period, from
the low price value to the high price value. This range is then expressed as a percentage of the
beginning of the period. Larger movements in price creating a higher price range result in higher
volatility. Lower price ranges result in lower volatility.

Problem statement:
For this research study on the basis of the secondary analysis we have formed the Alternative and
Null Hypothesis as:

Null Hypothesis (H0) – FII Inflows and outflows will not significantly affect the stock market
volatility.
Alternative Hypothesis (H1) – FII Inflows and outflows will significantly affect the stock
market volatility.

Page
16
METHODOLOGY

Statistical tool used: SPSS, MS Excel 2007

Technique used: Sampling design A Sample is an individual element or a group of elements
from a population. The process of selecting a sample from the population is called Sampling.
The entire population of listed companies can be segmented into mutually exclusive groups or
categories based on the sectors.

Comparisons of monthly mean of FII’s inflow by monthly mean of the Sensex.

In this we have taken monthly Sensex mean(volatility) as dependent variable and monthly mean
of FII’s inflow as an independent factor and we tried to establish a relationship between this two
variables, that whether a change in one factor brings about a change in the other factor or not. If
yes to what extent it is affecting the dependent variable. Here the value of = 0.774. So it
shows that, they are highly correlated, showing a positive relationship between them and are
directly proportional. There is 77.4% association between the sensex and FIIs , which means that
77.4% variation in the sensex is due to the FIIs.
Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1
.880(a) .774 .770 2139.06924

a Predictors: (Constant), monthlyinflow

Coefficients(a)

Standardized
Unstandardized Coefficients Coefficients t Sig.

Model B Std. Error Beta B Std. Error

1 (Constant)
73.313 515.384 .142 .887
Monthlyinflow
3.190 .226 .880 14.106 .000

a Dependent Variable: sdvofsensex

Page
17
 Model Summary and Parameter Estimates

20,000.00

15,000.00
Mean sdvofsensex

10,000.00

5,000.00

0.00
0.00 1,000.00 2,000.00 3,000.00 4,000.00 5,000.00 6,000.00
monthlyinflow

Page
18
 sensexmean

Observed
20000.00 Linear

15000.00

10000.00

5000.00

0.00
0 10 20 30 40 50 60
Sequence

Page
19
 ( 2 ) Comparision of quarterly mean of FII’s outflow by quarterly mean of
the Sensex .
In this we have taken quarterly sensex mean(volatility) as dependent variable and
quaterly mean of FII’s outflow as an independent factor and we tried to establish a
relationship between this two variables, that whether a change in one factor brings about
a change in the other factor or not. If yes to what extent it is affecting the dependent
variable. From the linear model used it is seen that the value of = - 0.21. It is
the value of determination of correlation which measures the linear association
between two variables 0.227 means that there is less correlation between the fii’s
quarterly outflow and sensex .

Model Summary and Parameter Estimates

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1
.477(a) .227 .187 210.91387

a Predictors: (Constant), quarterly outflow

Page
20
(3) Comparision of quarterly mean of the FII’s inflows by quarterly mean of
the sensex .
In this we have taken quarterly sensex mean(volatility) as dependent variable and
quaterly mean of FII’s inflow as an independent factor and we tried to establish a
relationship between this two variables, that whether a change in one factor brings about
a change in the other factor or not. If yes to what extent it is affecting the dependent
variable.From the linear model used it is seen that the value of = - 0.21. It is the

Page
21
 value of determination of correlation which measures the linear association
between two variables 0.106 means that there is less correlation between the fii’s
quarterly inflow and sensex .

Model Summary and Parameter Estimates

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1
.326(a) .106 .059 226.85247

a Predictors: (Constant), quarterly inflow

Page
22
Final Interpretation of the above outputs:
Comparing the various outputs of the methods used above , our result was the closetest in the
analysis of the monthly data. So we choose the final output and the finding of our research
objective in the same. The detailed analysis of the mean inflow of the FIIs with monthly mean of
the sensex is given below:
73.313 is the intercept

3.190 is the value of regression coefficient (error term)

Y’= 73.313+3.190X

t-value of monthly inflow is 14.106 with a probability for less than 0.05. Thus we can conclude
that monthly inflow is highly related to standard deviation of sensex.

Results of Regression analysis :

The prediction equation is Y’= 73.313+3.190X

t-value for the constant 0.142, not significant

t-value for the regression coefficient = 14.106, p<0.001

t-value which is greater than 0 , so one would conclude that this variable do add to the ability to
predict sensex.

R-squared is 0.774

Standard error of the estimate 2139.06924

The B value have been transformed into standard scores is referred to as beta, which indicates
that beta =0.880 has much more influence on the dependent variable. It is also to be remembered
that the beta coefficient obtained depends on the independent variable which has been used in the
analysis.

The prediction equation that we have arrived above is done taking other factors as constant. So
we can not actually say that what percentage, the other factor are affecting the stock volatility.
We all concluded that stock is affected by a number of variables of which FII’s is a part. So we
can not predict in the future, that upto what extent FIIS will be affecting the stock volatility.

Page
23
Research design:

From the hypothesis and the research problem stated it can be seen that this research project is of
an exploratory nature. It involves investigation and framing of a hypothesis which needed to be
tested. It is a case wherein the results expected are not definite. In order to explore the various
alternatives, qualitative techniques such as document analysis in the form of secondary data
analysis will be used.
From the various research papers that we have gone through, we have included the following as
our independent variables apart from FII Inflows which we will be testing against the Dependent
variable.

Independent Variable: FII inflows and outflows

Dependent Variable: BSE Sensex value (also using BSE Sensex as proxy of Nifty)

The FII holding patterns in a company's shareholding, reflects the confidence that the foreign
investors have in the company. The FII investor investment moves are very closely followed by
industry watchers, traders, brokers and even retailers. Backed with well supported research and
information these FIIs put their money only in companies where they see opportunities for good
returns. So, the increasing shareholding patterns are an indicator towards increasing FII
confidence in a company's growth prospects and hence equity returns.

Method of data collection

1. The research project deals with Sensex in the stock market which forms the dependent
variable. For measuring this criterion, the Sensex values on BSE are considered as a benchmark
and hence will be collected from the BSE site.
2. The data for FII holding in a company will be collected from the official website of SEBI.
3. The data collected is daily for the last 5 years (November 2003 – November 2008).
4. The data will be primarily formatted in excel and then will be entered in SPSS
5. As a last step regression analysis will be performed in SPSS.

Page
24
 Literature Review

1). Recent Volatility in Stock Markets in India and Foreign

Institutional Investors.

Researched By : Parthapratim Pal

Source: www.nseindia.com

To measure how much the volatility increased during a month, the following two methods of
estimating inter and intraday stock market volatility was used . The measures were suggested in
the SEBI Publication on volatility by Raju and Ghosh (2004).
The first formula measures inter day volatility by computing standard deviation of daily returns
on stock prices
The second formula uses intraday High and lows of stock market prices and estimate intra-day
volatility.

Daily Sensex data were used for estimation of volatility Data were taken from the Bombay
Stock exchange website (www.bseindia.com)

Calculations show that both inter and intraday volatility of BSE Sensex followed similar trend
during 2004.

To further analyze the unusual movement of Sensex share price movements of the thirty Sensex
companies were studied. Average monthly closing prices of the thirty companies were used for
the analysis. There has been a very sharp increase in the net FII investment in India since April
2003. For the financial year 2003-04, FIIs have invested more than Rs 44,000 crore of portfolio
capital in the Indian stock market.

Page
25
Conclusion

A number of studies in the past have observed that investments by FIIs and the movements of
Sensex are quite closely correlated in India and FIIs wield significant influence on the movement
of Sensex (Rangarajan 2000, Samal 1997, Pal 1998). This is so because other market participants
perceive the FIIs to be infallible in their assessment of the market and tend to follow the
decisions taken by FIIs.

2). Methods used for calculating returns on NIFTY index and

individual stock futures
Researched By: Kapil Gupta and Balwinder Singh

Source: www.bseindia.com

ABSTRACT:

The study investigates the week form efficiency in the equity market. The NIFTY and stock
returns are found to be deviating from the normal distribution. The futures prices are found to be
non-stationary at levels, whereas first difference futures returns are stationary. Empirical analysis
finds evidence of statistical dependence in the returns generating process. Further analysis
through the AUTOREGRESSIVE INTEGRATED MOVING AVERAGE (ARIMA) process
reveals that the NIFTY and the stock futures returns are not independent and shows strong
dependencies.

METHODOLOGY:
As returns are more likely to be normally distributed, the returns on NIFTY index and individual
stock futures are calculated in the following manner:

NORMALITY:
The primary condition for the return series following the random walk is that it confirms to
normal distribution. To test whether future returns confirm to the assumption of normal
distribution or not, the Kolmogrov-Smirnov (K-S) goodness of fit test has been employed.

Page
26
INDEPENEDENCE:
To test whether the successive returns of returns of Nifty or stock futures are independent or not,
AUTO CORRELATION TEST and ARIMA process are employed.

AUTO CORRELATION TEST:

Autocorrelation is a reliable measure for testing of independence of random variables in return
series. The serial correlation coefficient measures the relationship between the values of random
variables at time t and its value in the previous period. For a large sample, the Box-Ljung
statistics follow the chi-square distribution with m degrees of freedom.

AUTOREGRESSIVE INTEGRATED MOVING AVERAGE( ARIMA):

If we have to difference a time series d times to make it stationary and then apply the
ARMA(p,q) model to it, but when the original time series is ARIMA(p,d,q), where p denotes the
number of autoregressive terms, d the number of time the series has to be differenced before it
becomes stationary, and q the number of moving average terms.

RESULTS AND ANALYSIS:

Descriptive statistics and the K-S goodness of fit test are good measures to investigate whether
the return series confirms to normal distribution .in addition, K-S (Z- value)for Nifty futures is
significant. High volatility in the cash as well as futures market may be the reasons for
inefficiency of Indian equity futures market.

Page
27
3). Stock Market Return, Volatility and Future Output Growth -
Some Observations Relating to Indian Economy

Researched By: G. P. Samanta

Source: www.nseindia.com

The model presented by Guo (2002) consists of a number of equations for capturing/explaining
three types of relationship/observed phenomenon.

i. volatility-feedback effect (i.e. relationship between stock market volatility and its own
past values),
ii. Influence of stock market volatility on stock market excess return, and
iii. Impacts of both stock market excess return and volatility on future output growth. In the
same spirit, this article assesses the extent of volatility-feedback estimating following
auto-regressive model in ordinary least square framework.
The empirical analysis presented in this article is carried out based on monthly data on three
variables, viz., stock market excess return, stock market volatility and output growth. For
deriving monthly information on first two variables, relevant data on daily or less than monthly
periodicity are taken into consideration. These data are compiled and published by the Central
Statistical Organization (CSO) and are available in publications of many other organizations.
The IIP data used in this article cover the period April 1993 to December 2002 and thus monthly
information on output growth (Yt) is derived for the period May 1993 to December 2002.

Empirical Results:

In order to checking the robustness of our empirical results, all estimations are carried out
separately for three different time periods, viz.,
i. April 1993 to December 2002;
ii. April 1995 to December 2002 and

Page
28
 iii. April 1997 to December 2002. Empirical results show that stock market volatility is
strongly influenced by its own past values – pointing to the presence of significant
volatility-feedback effects in the stock market.

4). Report of the Expert Group on Encouraging FII Flows and Checking the
Vulnerability of Capital Markets to Speculative flows(Government of India
Ministry of Finance)

Research Members:
1) Chief Economic Advisor Chairman
2) Chief General Manager, RBI Member
3) Executive Director, SEBI Member
4) Joint Secretary (CM) Member
5) Joint Secretary (FB) Member
Source: www.rbi.com

ABSTRACT:

The report has succinctly brought out several relevant issues concerning FII flows, with the
recommendations focusing on policy measures needed to deal with these issues. This report
gives a detailed analysis about the FII’s inflows in India; the total number of FII’s registered in
India from year 1992-2006, i.e. on a yearly basis.
They had also analyzed that during the year 1993- 1994 there were only 3 FII registered in India
but in 2005 – 2006 the number increased to 803 signifying the interest of FII in Indian stock
market and also shows the net effect of FII’s in the Indian equity market, i.e. how FII’s affected
the volatility in the market.

The data is given on a monthly basis which shows the various factors that affects the volatility
in market. The data given in the report also gives an analysis about the volatility caused thorough
outflows as well as inflows.

Page
29
It also gives an analysis of the period during which the market has been volatile, i.e. the
episodes of volatility in India.

Apart from this the report explains evolution of FII’s policies in India, and comparison of FII’s
and FDI’s. There have been four episodes of vulnerability in India, which are negative shocks
affecting the economy, and influencing the behavior of investors. These are: the East-Asian crisis
in 1997, the Pokhran Nuclear explosion (May 1998) and the attendant sanctions, the stock
market scam of early 2001, and the Black Monday of May 17, 2004.10 The investment behavior
of the FIIs vis-à-vis the movements of the stock market indices during these episodes are given
FII investment behavior during these four specific events indicates that these events did affect
the behavior of the foreign portfolio investors. But, these events did affect domestic investors’
behavior as well. They have also analyzed the volatility in stock market in relation to different
events . The risk management system withstood volatility of 8 sigma or above as against the
normal built-in capacity of withstanding only 3-6 sigma variations internationally.

Page
30
5). A STUDY OF VOLATILITY IN INDIAN STOCK MARKETS TO
UNDERSTAND THE REASONS FOR
TURBULENCE IN THE LAST TWO YEARS

Research Members: Piyush Kumar Chouhan (Student – XIM) Vasant Shukla (Student – XIM)

ABSTRACT:

The stock market always keeps on shifting its trends, sometimes up and sometime down. As the
investors react to various events whether it be political or economic or any else, fluctuations in
prices of stocks are observed all over the world due to this. Whatever information we get is never
sufficient to find out what caused the market fluctuations. Thus in this research paper researchers
have tried to address some issues with respect to Indian stock market like - Has the stock market
volatility increased, has the Indian market developed into a speculative bubble due to the
emergence of "New Economy" stocks, why is this volatility so pronounced and so on.

It has been examined from the fundamentalist view put forward by economists who argue that
volatility can be explained by Efficient Market Hypothesis. On the other hand, the view that
volatility is caused by psychological factors is tested. An empirical study of BSE Sensex and a
set of representative stocks are carried out to find the changes in their volatility in the last two
years. The stock market regulation in introduction of rolling settlement and dematerialization as
a measure of reducing volatility is put to test.

Here VOLATILITY has been described as variability in the price over time measured as the
variance or the standard deviation of the returns on the asset. It is also taken as a measure of
riskiness. Two school of thoughts have been incorporated here. One view says that the market
movements can be explained entirely by the information that is provided to the market. And
another states that the movements have nothing to do with economic or external factors. It is the
investor reactions, due to psychological or social beliefs, which exert a greater influence on the
markets. Here various aspects have been studied like The Psychological Phenomenon, The

Page
31
Information Boo, The IT revolution, The Internet Myth, The feedback effect, Cultural Changes,
Stock Market Regulations, Dematerialization and Rolling Settlement.

Conclusion:

Though no fundamental factors emerge for the existence of such high volatility the researchers
find that other perceptual factors have led to this mad rush for stocks leading to volatility. The
market regulators have been trying their best to curb these speculative uprising but have not been
able to keep it in control. A more analytical media reporting which highlights better risk
management coupled with investor learning will surely lead to more stable market.

Page
32
 Current Scenario

At least one in two companies in the BSE-500 index, comprising the top 500 firms listed on the
Bombay Stock Exchange that account for 93% of India’s market capitalization, appear to have
seen a decline in holdings by foreign institutional investors (FIIs) since January, the peak of the
Indian bull market rally.
This conclusion is based on a Mint analysis of 173 stocks that have already disclosed changes in
their stock ownership for the quarter ended September. Most analysts expect this number will
rapidly grow as more companies report this data during the ongoing earnings results season.
So far, FIIs have withdrawn $11 billion (Rs53,240 crore) from the Indian equities market, the
first time in a decade when they have been net sellers. Last year, they had pumped in $17.8
billion, which had boosted the market to its highest ever levels in January.
About 105 of the 173 stocks that have released their data so far have seen their FII holdings fall
in the last three quarters. This fall has largely been broad-based, with foreign investors
withdrawing money across large- and mid-cap stocks. About 14 of the 30 stocks that make the
Sensex, India’s most widely tracked index, and 23 of the 50 Nifty index stocks, are also in the
same situation.
“Because of the global liquidity crunch, local arms (of FIIs) have been forced to liquidate their
holdings in India,” notes Nitin A. Khandkar, vice-president at Keynote Capital Ltd, a
Mumbai brokerage.

Top 10 BSE-500 index firms in which foreign institutional investors (FIIs) have decreased their stake

% Holdings of FIIs

Company Dec’07 Sep’08 Change in

Quarter Quarter %.
Development Credit Bank 30.25 12.84 -17.41
Dabur Pharma 9.67 0.02 -9.65
ACC 18.39 8.86 -9.53
Nagarjuna Fertilizers and Chemicals 14.52 6.95 -7.57
Orchid Chemicals and 18.65 11.13 -7.52
Pharmaceuticals
Bajaj Hindusthan 21.07 13.91 -7.16
Jyoti Structures 27.75 20.80 -6.95
Mercator Lines 21.79 15.00 -6.79
Infrastructure Development Finance 37.79 31.18 -6.61
Co.
United Phosphorus 44.48 38.24 -6.24
Source: Capitaline

Page
33
LIMITATIONS :

1) Foreign Institutional Investor includes foreign institutional investor and foreign direct
investment. For the project we had only included foreign institutional investors and not
the foreign direct investment.

2) We are not predicting the future impact of fii inflows and outflows on Sensex because
there are many other factors affecting sensex, so fii impact on movement cannot be
determined.

3) We had not considered fii investment in debt instruments. We had only considered fii
investment in equities.

4) In the project we had only focused on BSE Sensex and had used it as a proxy
of NSE because 99.99% of the time the fii impact on NSE will be same as BSE
.
We had not considered daily closing data of Sensex; instead we had used monthly and quarterly
data. The reason was that in daily data the clear picture of relationship between FII and
Sensex was not portrayed , which was later on shown through monthly or quarterly data .

Page
34
LEARNING’S :

The learning’s out of the project done is:

1) We have learnt about the various functionality of SPSS, where we have applied various
tests and try to build some models between the relationships of the variables.
2) Practical application of quantitative techniques.
3) Collection of data from various sources like websites, articles, discussions and others.
4) Verifying the nature of data.
5) Impact of FIIs inflows and outflows on Sensex and their relationship with respect to
monthly and quarterly.

Page
35
FINDINGS :

The findings out of the project are:

1) A complete idea about the concept of volatility and its analysis by calculating intraday
volatility, monthly volatility and yearly volatility.
2) A perfect relationship between FII’s and Sensex built on regression model.
3) FII’s does affect the Sensex to an extent but it is not only the individual factor affecting it
because there are many other factors which affect the Sensex, which comes to play in the
long run.
4) The inflow and the outflows of FIIs affecting the Sensex is also due to various extraneous
factors which have caused FII’s to buy and sell. Ex: - Liquidity crunch in U.S causes
FII’s to sell their stake in Indian stock market.

SUGGESTIONS :

The suggestions out of the project are:

1) The collection process of data should be proper and the nature of data is very much
important which can affect the result of findings.
2) Individual impact of the FIIs inflows and outflows shows a better relationship with the
Sensex other than the net impact of the FIIs.
3) The statistical test which have to be applied for the project should have logic behind it
which should be appropriative.
4) Proper literature review has to be done.

Page
36
BIBLIOGRAPHY :

1) An introductory guide to SPSS for windows – second edition - by -Eric L Einspruch

2) Data Analysis – using SPSS for Windows – Version 8-10 by - Jeremy J . foster
3) An introduction to stock market volatility – by james fresher
4) An overview of Foreign Institutional Investors – by Richard Benson
5) SEBI website
6) BSE website

Page
37