An Empirical Analysis on the Dynamic Relationship between FII Trading Volume & Nifty Returns

This paper empirically examines the relationship between trading volume of FII flows and volatility of stock returns. The contemporaneous correlation and asymmetry between NIFTY returns and FII trading volume is studied through OLS. There is evidence for positive contemporaneous correlation between returns and volume. The relationship between conditional volatility and volume is investigated through GARCH model by introducing volume as an explanatory variable in the GARCH equation. The results indicate that GARCH effect is reduced only to a negligible level by the inclusion of trading volume of FIIs as an explanatory variable. This implies that FIIs influence towards persistence of volatility is very low and there may be other factors responsible for the same