A Study on How Institutional Investors Respond to Risk, Return and Volatility: Evidence from the Indian Stock Market

Given that India has become one of the most desirable investment locations in Asia, the current study aims to ascertain the influence of risk, return and volatility on institutional investments on the Indian stock market. For a span of 10 years, from January 2010 to December 2021, the study used quarterly data on the stock market return, risk and other associated indicators to accomplish the aforementioned goal. The results of the VAR estimation and Granger causality tests show that FIIs have unidirectional relationship with debt-equity ratio, price-earnings ratio, total risk and with firm performance (TOB). On the other hand, DIIs have unidirectional relationship with debt-equity ratio, return on equity and with firm performance (TOB). It also shows bi-directional relationship of FIIs with TA and ST and DIIs with SD. The variance decomposition analysis findings show that while total risk is more significant than return for both institutional investors, FIIs have a greater impact on growth of the firm performance than DIIs. Additionally, total assets, share turnover and return on equity are describing the reasons behind the foreign institutional investor’s ownership although idiosyncratic risk, beta, promoter’s shareholding and debt-equity ratio are more crucial in explaining DIIs. Total risk (SD) and return (RETURN) are the two key exogenous variables that influence institutional investors, including both DIIs and FIIs, in changing in their investment decision. However, over the long term, RETURN is the factor that both FIIs and DIIs use to choose whether to invest their money in India.