This study evaluates the response of stock market volatility to foreign equity investments. Specifically, the study examines how foreign portfolio investment and foreign direct equity investment influence stock market volatility in Nigeria, using monthly data from January 2007 to July 2017. Results of preliminary analyses of stock market returns series show evidence of negative skewness, leptokurtosis, non-normal distribution, and average positive monthly return. Estimates from the GARCH-X (1,1) model show evidence of volatility clustering in the stock market returns. The estimates also show that stock market volatility responds to changes in foreign portfolio investment. On the other hand, changes in foreign direct equity investment do not influence stock market volatility. The key implication is for investors to adjust their portfolio to changes in the foreign portfolio investment, in order to mitigate stock market volatility, and for stock market regulators to encourage more inflow of foreign direct equity investment as a more stable source of foreign equity investment.

Response of stock market volatility to foreign equity investments

The information disclosed by the companies in their annual reports reveals much about company’s performance and prospects. Investors take the information as base for decision for investment. Under such circumstance, companies choose to disclose beyond what is mandatorily required. Theories like agency theory, capital need theory and signaling theory support the need of voluntary disclosure. This study is about the relationship between voluntary disclosure and value of Indian pharmaceutical companies listed on World’s oldest stock exchange, Bombay Stock Exchange (BSE). Objectives: Twofold : First, to investigate the extent of voluntary disclosure practices prevailing in pharma sector of India, Second, to study the impact of voluntary disclosure on Value of companies (value as measured by Weighted Average Cost of Capital, Stock Volatility and Price to Book Ratio) for the year 2010-2011 to 2017-2018. Research Methodology: To understand the extent of disclosure, a disclosure checklist is constructed and descriptive statistics are carved to reach the results. To understand the impact, Panel data regression (Fixed effect model, Random effect model, Hausman test) are run. Observation: Voluntary disclosure does not affect WACC but are negatively related to stock volatility and Price to Book Ratio in Indian scenario.

Towards the Association of Voluntary Disclosures and Value of Firms: Evidence Revisited in India

This study investigated the directional linkages among net foreign portfolio investment volatility, financial deepening and capital market performance in low-income Southern African Development Community (SADC) countries employing a dynamic panel vector error correction model (P-VECM) on unbalanced quarterly panel data for the period spanning from 2000 to 2015. Using cointegration analysis in P-VECM, the study established the existence of a long-run equilibrium relationship among the variables. The pairwise test demonstrated that there is a unidirectional causality relation from net portfolio investment volatility to financial deepening in low income SADC markets. Furthermore, the results indicate a bidirectional causal relationship between real gross domestic product (GDP) and the performance of capital markets, suggesting that as GDP grows, capital markets perform better or vice versa. Additionally, the results reveal that real GDP unilaterally leads both net portfolio investment volatility and financial deepening in these economies. Conversely, the pairwise test distinctively indicates that capital market performance is neither causally related to financial deepening nor to the variability of foreign portfolio investment flows in the selected economies. It is therefore recommended that policy makers in low income economies should embark on programmes that attract more players in the domestic markets to encourage the deepening and performance of financial markets, which will in turn strengthen the long run causality with net foreign portfolio investment flows.

JEL Classification: F21, F32, E44, G15

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Causal Dynamics among Foreign Portfolio Investment Volatility, Financial Deepening and Capital Markets in Low Income Countries

Determinants of stock market returns in emerging markets: The linkage between institutional quality and macro liquidity

The purpose of this article is to examine the knowledge of the Indonesian people about the capital market and the activities which occur therein. The methodology used to analyze the level of knowledge of Indonesian people about capital market activities is the purposive and convenience nonprobability sampling method. The authors design questions to measure basic knowledge related to stock market activities, as well as questions to measure financial knowledge related to capital market instruments. The purposive and convenience nonprobability sampling method was used to select respondents in this study. Questionnaires were implemented from various segments of Indonesia's educated and working population (teachers, lecturers, administrators, students, workers, traders and professionals in various economic sectors). The results showed that public awareness of the existence and effective function of the capital market in Indonesia was at a fairly low level. This is caused by the lack of public knowledge of all activities that exist in the capital market in general. Investors can become more active when they have adequate knowledge about various trading activities in the capital market. The findings in this study have the implication that understanding public knowledge is very important in the process of disseminating company information, corporate communication strategies, growing number of investors and issuers so that investment instruments in the capital market can be well received.

Analysis of Knowledge About Capital Market Activities in Indonesia

Although, it is a generally held belief that foreign portfolio flows benefit the economies of recipient countries, policy-makers worldwide have perennial discomfort about such investments. Such portfolio flows are widely termed as "hot money," given its notorious volatility compared to other forms of capital flows as foreign investors make sudden and concerted withdrawals of portfolio investments at the faintest smell of trouble in the host country, thereby accelerating and magnifying the inconspicuous problem of the downfall in stock prices, often leading to disastrous consequences to the host economy. The discussion is often emphasized by the financial press due to the visible evidence of their contemporaneous nature at times of economic crisis. Relationship between foreign institutional ownership and volatility is largely inconclusive. Although the literature in business newspapers and also some previous empirical studies suggest that institutions tend to destabilize prices by increasing turnover levels, there are some good reasons to believe that higher levels of institutional ownership could be negatively related to volatility. In this present study, using firm-level Indian panel data from 2003 to 2013, we analyzed the association between stock's return volatility and their FII holdings in a VAR framework. The results showed that no significant causal relationship exists between the two variables.

Foreign Portfolio Investment and Stock Market Volatility in India

With global financial integration, emerging markets have gradually become more attractive destinations for international investors who seek higher returns than their own developed markets while diversifying their risk. In India, since the middle of 2003, significant increase in the inflow of foreign institutional investments has made it the most important source of portfolio investment. The Indian business newspapers repeatedly point out that the actions of foreign investors have an impact on the movement of the share prices. However, previous literature (before 2003) on Indian data established that stock returns influence the movement of foreign institutional investment, and not vice versa. However, these studies looked at the period before 2003, and given the structural change in share prices and net foreign institutional investment flows since the middle of 2003, it would be sensible to re-examine their relationship using more recent data. Also, as equity markets gets stuck by weaknesses in transparency and information disclosure policies, its reliability is said to be improved by raising firms' disclosure. Hence, in this present study, using firm-level Indian data from 2001 to 2008, we show that both concurrent and lagged foreign institutional investment flows and voluntary disclosure are negatively related to returns volatility. Our empirical results are consistent with the previous literature. Supporting our speculation that institutions herd on disclosure quality (signals), we tried to find out whether the correlation between volatility and foreign institutional ownership is higher for firms with higher voluntary disclosure. At the end, we tried to find out the direction of relationship among all of these three variables, and attempted to see whether there exists any moderating or mediating effect of one variable over another on volatility. The results are robust to many control variables. We analyzed the annual reports of selected Indian listed companies in constructing firm-specific voluntary disclosure measures and used panel data for regression purposes.

Suddhasanta De

Papers

Foreign Portfolio Investment and Stock Market Volatility in India

Disclosure, Foreign Institutional Investment, and Volatility: A Study in the Indian Context