Linkages of Foreign Portfolio Investments and Stock Market Indices: Evidence from BRICS Nations

Abstract

It is difficult for emerging economies like BRICS to sustain growth without steady influx of foreign capital. Foreign Portfolio Investment (FPI) or Foreign Institutional Investors (FII) have impacted, more often than not, positively on the stock markets of these countries.Since 1990, both Advanced and Developing countries have been trying to attract Foreign Portfolio Investment (FPI) or Foreign Institutional Investors (FII) by adopting policies like financial reforms, improved infrastructure, deregulation of policies, effective corporate governance, removal of bureaucratic bottlenecks etc.  The main objective of this paper is to analyse the linkages of FPI/FII investments and the equity markets of these countries.  It is widely believed that the FII/FPI inflows have varying degrees of relationship (from Highly Significant and Positive to highly Insignificant and negative) with the Stock Market Indices of BRICS Countries. We used net flows of foreign portfolio investments received by BRICS countries and their major stock market indices to establish the relationship. The stationarity of the data series are checked using Augmented Dickey Fuller (ADF) Test and tested for the autocorrelation, Vector Autoregression (VAR) and Wald Test are applied to analyse the data. The results may have policy implications for the FII/FPIs and other investors as well, trying to look out for alternate investment opportunities in BRICS countries.

Keywords: FPI/FII, Stock Market Index, Linkages, BRICS.