Granger Causality between FII Transactions and IPO Indices in India

Abstract

This study investigates the Granger causality relationship between Foreign Institutional Investor (FII) transactions and Initial Public Offering (IPO) indices within the context of India's financial market. The study uses monthly FII transactions data for all India for the 12-year period from April 2011 to March 2023. The corresponding period IPO index data for S&P BSE IPO and S&P BSE SME IPO were obtained from the BSE website. Granger causality was used to examine the impact of FII transactions on the IPO index for different monthly lags. Stationarity has been derived for the chosen data, without which, it may lead to spurious regression results. All the data has been transformed to log form, to create the common base. FMOLS (fully modified ordinary least square) technique has been used for regressing the IPO index performance from FII transaction, which is free from serial correlation & Auto regression. The results of the study suggest that there is a unidirectional Granger causality from FII transactions to the BSE IPO Index and the SME IPO Index. This means that FII transactions can help to predict the future performance of the IPO indices. However, the R-squared values are relatively low, suggesting that there are other factors that also influence the indices. Some of these factors could include the macroeconomic environment, such as interest rates or inflation, or the performance of the broader stock market