Trading Behavior of Institutional Investors Across Weekdays: An Indian Evidence

Author:Garg, Ashish

The paper examines the trading pattern of Foreign Institutional Investors (FIIs) and the Indian Mutual Funds (IMFs) across the days of the week for a period of nine years from January 2000 to January 2009. A set of parametric and econometric tests were employed to test the equality of daily mean investment of FIIs and IMFs. The findings of the study show that net investment made by the FIIs... (see full summary)



Cross (1973) was the first to point out the differences in return across weekdays. Since then, the stock market efficiency is an extensively researched area of investment management. Day-of-the-week effect is the most talked anomaly. However, due to the increased use of Information Technology (IT) and the ongoing stock market reforms in various countries, investors might expect stock markets to be free from such anomalies. Despite frequent claims of market efficiency, literature on the subject offers evidence of seasonal/calendar anomalies both in the developed and emerging stock markets. A review of the existing studies, i.e., Rozeff and Kinney (1976), French (1980), Lakonishok and Smidt (1988), Cadsby (1989), Cadsby and Ratner (1992), Agrawal and Tandon (1994), Steeley (2001), Hellstrom (2002), Kok Kim (2002), Pandey (2002), Russel and Torbey (2002), Sales and Caro (2006), Sah and Omkarnath (2007), Baek et al. (2008), and Ricky et al. (2008), indicates that the stock markets of the developed as well as developing countries are not yet free from the seasonal anomalies, despite the increased use of IT and numerous regulatory developments.

Researchers have stated various causes in order to explain the days-of-the-week anomaly, specially the Monday and the Friday effects, just like the timing of earnings announcement, settlement effect, measurement error impact, and the liquidity effect or specialist effect bias etc. Besides these, several researchers, including Osborne (1962), Ritter (1988), and Lakonishok and Maberly (1990), suggest that the day-of-the-week effect may be driven by the trading pattern of individual investors, as they are of the opinion that individual investors face an asymmetry of brokers' recommendations in both form and time. Groth et al. (1979), Miller (1988), and Lakonishok and Maberly (1990) report that during weekdays brokers encourage individuals to buy. They find in their studies that analysts issue six buy recommendations for every sell recommendation. So during the weekdays, investors follow their recommendations of buying. However, during the weekends, when individuals have time to gather and process the information and to reach an investment decision, they make rational decision of buying and selling according to their perceptions, which make a significant difference to the investment pattern of weekdays and weekends.

On the other hand, some researchers have a different opinion. In their view, institutional investors play a crucial role in the movement of the market as they hold a major chunk of the share in leading companies. They are, therefore, comparatively in a strong position to influence the movement of the market. Studies of Amihud and Mandelson (1994), Warther (1995), Froot et al. (2001), Mukherjee et al. (2002), Badhani (2005), Bhattacharya and Mukherjee (2005), Porwal et al. (2005), Rao et al. (2005), and Karmakar (2006) indicate a positive relationship between stock market return and FIIs. As the foreign investors purchase more and more, the stock market returns move upward and vice versa (Figures 1 and 2). Figure 1 depicts the net investment made by the FIIs in the Indian stock market, while Figure 2 shows the movement of market capitalization. We can observe that more or less FII investment and market capitalization are moving in the same direction. From this we can infer that FII investments significantly explain the stock market movement. So it can be interpreted that investment pattern of foreign investment can be a cause of seasonal pattern.

Literature Review

Many studies have been carried out to determine the pattern of institutional investors' investment and its potential effect on stock market. Badhani (2006) finds sluggish investment activities of FIIs on Tuesdays, as they receive instructions from their home country on Mondays and make local investment strategies on the next day. Venezia and Shapira (2005) capture the trading behavior of institutional investors and individual investors in Israel and find that the weekends influence both amateurs and professional investors; however, they affect them in opposite directions. Kamara (1997) observes that the Monday seasonal has declined with the increasing role of institutional investors in the stock market. Sias and Starks (1995) find that the weekend effect is driven...

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