An Examination of Home Advantage (Bias) Argument in the Indian Financial Markets

Abstract

In this paper we examine if Domestic Financial Institutional Investors (DFIs) have any home advantage (Bias) compared to Foreign Institutional Investors (FIIs) for both the equity and debt segments of the Indian capital market. We find that both the DFIs and FIIs follow a positive feedback trading mechanism chasing stock market returns. However, FIIs seem to be reacting faster compared to DFIs in case of equity market. This may be owing to the fact that the former have international expertise and greater resources and play a dominant role in this segment of capital market as shown by their share in the trading volume. In contrast, the DFIs lead the market returns which in turn attract the FIIs thus supporting home advantage (bias) argument. Interestingly, the DFIs, unlike in equity market, play a more important role in debt market trading activities. Our results point at greater debt market inefficiency in the Indian context, which may be a reflection of the relatively underdeveloped nature of this market. 

Key Words:  Home advantage (bias), Domestic Financial Institutional Investors, Foreign Institutional Investors, Market returns, Equity market, Debt Market.

JEL Classifications: G100, G140