FII Profitability and Market Uncertainty: An Emerging Economy Context

Abstract

This study aims to uncover differences in profitability and market timing skills of Foreign Institutional Investors (FIIs) against benchmarks. Using a Markov Regime Switching Model, the article comments on the extent of information utilization by FIIs during periods of low and high economic uncertainty across global (NASDAQ-Composite 3000) and local markets (NIFTY-500 index). The results show significant over-performance (under-performance) in FIIs against benchmarks (NIFTY-50 and NIFTY-500 indices) during low (high) market uncertainty for local uncertainty. However, there is no significant difference in the overall profitability of FIIs during events of global economic uncertainty. The analysis utilizes precise estimates by taking all companies within the index individually and maintaining holdings for all. The article utilizes profitability measures of cash flows, Modified Internal Rate of Return and Buy-and-Hold-returns. The results of this study are relevant to institutional investors, policymakers and investors, especially during local and global uncertainty events.