Foreign Fund Flows and Asset Prices: Evidence from the Indian Stock Market

We study the effect of foreign fund flows on asset prices by investigating the link between foreign

institutional investor (FII) flows and stock returns in India. Stocks experiencing high innovations

in FII order flow are associated with a permanent price increase, whereas stocks experiencing low

FII order flow innovations are associated with a partly-transient price decline. The differential

abnormal return between high and low innovation stocks is significant, largely unrelated to firm

characteristics, and increasing during periods of market stress. The findings are consistent with

price “pressure” induced by FII sales, as well as information being revealed through both FII

purchases and FII sales.