An Empirical Study on the Impact of FII and DII on Volatility, Leverage and Long-Term Returns of the Indian Stock Index

Abstract

Estimating volatility is the key factor to be analyzed in taking the financial decisions. Financial strategies are framed after due investigation of financial market volatility. This study examines the impact of foreign institutional investment (FII) & Domestic Institutional investment (DII) in Indian stock market and analyses the volatility of National Stock Exchange (NSE) categorical indices for the period of 10 years from 20th February 2014 to 20th February 2024. The study is conducted using the logarithmic return of series of Nifty 50, Nifty Midcap 50 & Nifty Small Cap 50. GARCH (1,1) and T-GARCH (1,1) model have been used to check the volatility & leverage effect in the three major indices of Nifty. The study shows Nifty MidCap 50 is highly volatile compared to Nifty50 & Nifty Small Cap 50. By analyzing T-GARCH all the indices have leverage effect. Moreover, foreign institutional investment (FII) & Domestic Institutional Investment (DII) have statistically significant impact on volatility of Nifty 50 & Nifty Midcap 50. The study will be helpful for the retail as well as institutional investors for identifying & comparing the volatility of different indices.