Journal of Business & Economic Policy ISSN 2375-0766 (Print)2375-0774 (Online) Vol. 1, No. 2; December 2014 106 Impact of FIIs Investment on Volatility of Indian Stock Market: An Empirical Investigation Bashir Ahmad Joo Associate Professor The Business School, University of Kashmir E-mail: bjazra2000@yahoo.co.in Zahoor Ahmad Mir Research Scholar Department of Commerce, JamiaMilliaIslamia E-mail: zahoor4kmr@gmail.com Abstract The investment by Foreign Institutional Investors (FIIs) has become a dynamic force in the development of Indian stock market and is increasingly seen as an important cause of stock market volatility. This state of affairs has propelled researchers to study the nexus between FIIs capital flows and stock market volatility. In order to ascertain the link between the two, present study makes a modest attempt to develop an understanding of the FIIs investment and its impact on stock market volatility. The study is conducted using monthly time series on NIFTY, SENSEX and FIIs activity for a period of fifteen years spanning from January, 1999 to December, 2013. To check the non-stationarity of the time series the Augmented Dickey-Fuller (ADF) unit root test is applied. In present study, statistical tools like mean, variance, standard deviation, skewness and correlation analysis are used to examine the impact of FIIs impact on Indian stock market volatility. In addition to these tools, GARCH model is also used to study the impact of FIIs capital flows on stock market volatility. The study reveals that there is significant relationship between FIIs capital flows and stock market volatility. Moreover, FIIs investment has statistically significant influence on volatility of NIFTY and SENSEX, used as proxy to Indian stock market. Keywords: Volatility, FIIs Capital Flows, NIFTY, SENSEX, GARCH JEL Classification: G10, G14 1. Introduction A critical challenge for any economy is the allocation of savings to available investment opportunities. Economies that do this well can exploit new business ideas to spur innovation, create jobs and wealth at rapid pace. In contrast, economies that manage this process poorly dissipate their wealth, fail to support business opportunities and witness decline in their economic growth rate. In fact, healthy investment in the economy has positive impact on economic growth and leads to enlarged market size, which in turn attracts further capital inflow. In this context, if domestic capital falls short of required capital investment in the economy, foreign capital inflow fulfils this gap and plays a critical role in explaining growth of the host country. It not only accelerates the economic growth by supplementing domestic capital but brings in various other benefits to the host country like technology, skill development and latest know-how. The investment of capital that flows from one country to another country is known as foreign investment. Inflow of foreign investment is normally encouraged in the capital scarce economies because it complements and stimulatesdomestic investment. In India, foreign investment were allowed in 1991 either through stock market investment in listed companies referred to as Foreign Institutional Investors (FIIs) investment or directly in listed and unlisted companies referred to as Foreign Direct Investment (FDI). Among two former plays a dynamic role in shaping the stock market indices and stock prices of various companies in the host country. FDI is considered as a developmental tool and helps in achieving the self-reliance in various sectors, thereby leads to overall development of economy.