Domestic Institutional Investors and Sectoral Indices of India:

A Toda Yamamoto Approach

Purwa Srivastavaa,* , Sakshi Varshneya
a. Humanities and Social Science Department, Jaypee Institute of Information Technology, Noida-201304, Uttar
Pradesh, India.
* Corresponding Author, E-mail: [email protected]

Article Info ABSTRACT

Article Type: Research The study investigates the behavioral dependence of domestic institutional
Article investors (DIIs) on the sectoral indices of the national stock exchange of
Article history: India. For the first time in the Indian context, domestic institutional
Received: 18 January 2021 investors are studied in a broad sense, i.e. the study does not include merely
Received in revised form: 19 mutual funds, but financial institutions, insurance companies, and venture
April 2021
capital funds also. The results reveal positive and strong behavioral
Accepted: 24 May 2021
Published online: 09 May dependence of many sectoral indices in the national stock exchange on
2023 financial institutions, insurance companies, and mutual funds. The

Keywords: Correlation results support the results of the Toda Yamamoto model by
Domestic Institutional showing strong and positive correlations of sectoral indices vis á vis
Investors, financial institutions, insurance companies, and mutual funds. The results of
Financial Institutional, the Toda Yamamoto model for venture capital funds, on the other hand, are
Insurance Companies, insignificant with a weak correlation. In contrast to the findings of many
Mutual Fund,
previous studies that mutual funds do not affect future stock returns the
Sectoral Indices,
Toda Yamamoto Model, current study reports that causality runs from financial institutions,
Venture Capital Funds. insurance companies, and mutual fund investments to sectoral indices of the
JEL Classification: national stock exchange of India. These results illuminate the important role
G230. played by domestic institutional investors in Indian stock markets.
Cite this article: Srivastava, P., & Varshney, S. (2023). Domestic Institutional Investors and Sectoral
Indices of India: A Toda Yamamoto Approach. Iranian Economic Review, 27(1), 181-199. DOI:
https://doi.org/10.22059/ier.2021.81924
©Author(s). Publisher: University of Tehran Press.
DOI: https://doi.org/10.22059/ier.2021.81924
Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 182

1. Introduction
The growth of the capital market of a country always requires a flow of investment to
serve the requirement of investment projects, and the move of domestic institutional
investors (DII) can be regarded as noteworthy in this direction. The financial markets
are one of the parameters for the real economic development of a particular nation. As
per financial economists, two principal channels can lead to the improvement of the
financial system of a country causing economic growth. Firstly, economic growth is
done by capital accumulation through foreign institutional investment (FII). For the
mobilization of savings and channeling them for capital build-up, a systematic and
structured financial system is required. This shows that a robust financial system can
lead to economic growth. Secondly, an efficient financial system can provide credit and
other financial facilities to industries. Thus, this exhibits the importance of financial
markets fueling the economic growth of a nation.
In this direction, institutional investors are crucial players in the growth of the
financial markets. The organizations that pool a tremendous amount of money in shares
and many other types of financial assets are called institutional investors. Mutual funds,
Insurance companies, financial institutions, venture capital funds, hedge funds, and
pension funds come in this category. These investors are different from each other as
each is having a different risk-taking capacity, investment beliefs, tax issues, and
governance structures. They deal with a large volume of data for investment in shares,
and hence the influence created by them on the stock market is implied.
In comparison to individual investors, institutional investors are more influential as
they have better resources to manage their investments. Mutual funds are trusts, which
make a pool of funds from the saving done by various investors who have similar
financial goals. Very qualified managers manage these funds, and these funds aim to
create capital gains for the investors. The primary purpose of insurance companies is to
provide insurance, but they provide a variety of other schemes which apart from
insurance also promise for the growth of money invested in the scheme. Investments
done by these insurance companies are usually stable and for the long term. Pension
funds and insurance companies are major domestic institutional investors in many large
developed economies like Canada, Netherlands, USA, and UK (OECD, 2013). As far as
India is concerned, it is an emerging economy, and the role of pension funds as
institutional investors is in a developing phase. Financial institutions comprise all public
and private banks and non-banking financial institutions that invest in capital markets as
they want to earn on the surplus money which they hold. Venture capital is an
investment that is done into the equity share of a firm that has the potential to grow in
the near future. Due to the growing international competition scale and number of
business firms are increasing in India and thus the investment in venture capital funds
also proliferating.
Regarding India, post-liberalization the capital markets have shown enormous
growth, which leads to change in the economic conditions within the global sphere. The
growth of Indian capital markets has attracted many foreign institutional investors as the
investment made by them dictated the style of the markets. Apart from FII, DII also
 183 Iranian Economic Review, 2023, 27(1)

influence the movements of the stock markets. Over the past years, the investments
done by DII’s have increased a lot into the Indian stock market. The investment done by
DIIs in Indian stock markets increased to Rs 20.42 trillion in June 2019. From the year
2009 to 2019, the DII ownership in Indian equity markets has increased 2.12 percentage
point to 13.78 percentage point, which means an increase of 11.66 percent (Coutinho,
2019).

Figure 1. Growth Of DII in the Indian Capital Market Till

Source: Research findings.

As the participation of DIIs increases in the Capital market, they are not only going to
affect the Nifty50 index of the National stock exchange of India (NSE) as a whole, but
they can also impact the sectoral indices of NSE. The sectoral indices constitute the
performance of the companies which represent the activity under one specific sector.
Like Nifty Auto, an index is designed to represent the performance of the automobile
sector (15 stocks). Nifty Bank reflects the behavior of large and liquid banks (12
stocks). Nifty FMCG reflects the behavior of FMCG companies (15 stocks). Likewise,
other indexes are also made as nifty IT (20 stocks), nifty Media (15 stocks), nifty
Pharma (10 stocks), nifty PSUbank (12 stocks), nifty Private bank (10 stocks), nifty
reality (10 stocks). Not only this, three major indexes of NSE i.e. nifty 500 1, nifty2002,
and Nifty 1003 are also included in the study.
Objectives of the Study
1) To find the behavioral dependence between the individual domestic institutional
investor i.e. the Mutual Funds (MF), insurance companies (IN), Financial
institutions (FI), and venture capital fund (VC) vis á vis the sectoral indices of
the national stock exchange i.eNiftyAuto, NiftyBank, NiftyFMCG, NiftyIT,
NiftyMedia, NiftyPharma, NiftyPrivatebank, NiftyReality, Nifty100, Nifty200,
and Nifty500.
2) To find out how strong the relationship between the institutional investors and
the sectoral indices of the national stock exchange is. The rest of the paper is
arranged in the following manner next section contains the literature review,
Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 184

Section 3 continues with the data and methodology explanation followed by

Section 4 which holds the empirical results, and finally, Section 5 concludes the
paper.
2. Literature Review
A study in Kenya (Nairobi stock exchange) conducted by Ndei et al. (2019) during a
period of January 2010 to December 2017 reveals that Mutual funds sales granger
causes stock market returns and vice versa. If stock market returns increase then mutual
fund managers will buy more stocks and when mutual fund managers buy more stocks,
the price of stocks increases more market-leading to the consequent increase in market
returns. Cha (2018) analyses Korean markets and that mutual funds do not Granger
cause stock market returns, but it is the stock market returns that cause mutual funds in
the presence of market fundamentals. The study was covering a data set from Januarys
1995 to December 2016. A study on the Taiwan market with a sample from January
1999 to September 2006 (Chiang et al., 2012) discloses that when the stock price is near
equilibrium, then DII purchases stock which positively impacts the stock markets of the
Taiwan stock exchange. Baik et al. (2010) Conducted a study on the effect of trading
activity done by local and non-local institutional investors on stock returns. The sample
period of the study is from 1995 to 2007 which included all types of institutional
investors like investment advisors, insurance companies, mutual funds, and banks. Both
domestic and foreign institutional investors forecast future stock returns but the
auguring power of domestic institutional investors is statistically more significant. Oh
and Parwada (2007) studied the relationship between stock market returns and mutual
funds in Korean markets. The research incorporated daily data from 1996 to 2003,
which reveals that mutual fund purchases cause stock market returns and a positive
relationship exists between the two. The data on net mutual funds reveals that it is the
returns that cause the flow. Samarakoon (2009) divided the investors into foreign
institutional investors, domestic institutional investors, domestic individual investors,
and individual foreign investors in Sri Lankan markets and found the relationship with
equity flows. Findings show that the purchase and sale of both the investors, either
institutional or individual, had positive relationships with past returns; the exception
was the crisis period where negative relation was coming. Domestic institutional
investment and foreign institutional investment lead to higher future returns. Boyer and
Zheng (2009) studied an extended period of data from 1952 to 2004 in which various
investor types were covered to study the relationship with the stock returns, like
insurance companies, mutual funds, pension funds, household, foreign investors, and
closed-ended fund of U.S equity market. Correlation results and regression analysis
results show that the contemporaneous relation between foreign investors and mutual
funds with stock returns are favourable for the full sample. The paper reports weak
evidence of the ability of investor types to augment for future stock returns. An error
correction model applied on the data of Greece stock exchange for a period of July 1994
to December 2003 gives an indication of bidirectional causality between the stock
returns and Mutual funds (Alexakis et al., 2005).
 185 Iranian Economic Review, 2023, 27(1)

Talking about studies in Indian markets, Acharya (2011) took data from a period of
January 2000 to December 2009 which he divided into three sub-periods (2000- 2003,
2004- 2007, and 2008- 2009) due to the possibility of changes in trends. He found
substantial changes in the results of three sub-periods. In the first two sub period’s
bidirectional Granger causality was coming between mutual funds and stock returns.
However, during the third part of the period, the causality running from stock returns to
mutual funds was unidirectional. Naik and Padhi (2014) studied a data set of FII and
Mutual funds from January 2002 to July 2012 under a VAR model. They found
bidirectional Causality from BSE returns and institutional investments. They found that
mutual funds (which represent DII) and FII are significantly influencing the BSE
returns. On the contrary, Sehgal and Tripathi (2009) found that Mutual funds are not
having any causality for stock returns, but it is the BSE Sensex returns that cause the
inflow and outflow of mutual funds. A causal study of stock returns of BSE Sensex4 and
mutual funds in Indian markets shows that mutual fund sales are caused by the stock
markets returns whereas the latter is not affected by the former (Thenmozhi and Kumar,
2009). A similar study of Indian stock markets by Bose (2012) where she has taken
daily data from April 2008 to March 2012 found no causal relationship between mutual
funds and BSE stock returns. Ghosh (2014) conducted a regression analysis to find out
the relationship between FII and DII with BSE5 100 by taking data from around six
years (SEPT-2007 to OCT-2013), and the results depicted that BSE100 returns showed
dependence on the DII trading activity.
The variance decomposition analysis in a VAR scenario of stock returns and
Domestic institutional investors of India shows that DII purchases define market
returns, whereas market returns define DII sales. The data of DII contains combined
data of mutual funds, banks, insurance companies, and financial institutions from the
period of March 2007 to June 2016 as the separate data of individual DII was not
available (Mishra and Debasish, 2017). Arora (2016) investigated the relationship
between the equity flow of DII as well as FII and stock returns. A more comprehensive
definition of the DII has been used in the study, which includes mutual funds, insurance
companies, financial institutions, and banks but the individual data was not available so
consolidated data was used. Under the VAR environment, correlation test, and Granger
causality test, the study finds a significant positive relationship between stock market
returns and DII. Natchimuthu and Prakasam (2018) find granger causality running from
market returns to domestic institutional investors and not vice-versa this result is also
supported by Chauhan and Chaklader (2020).
All studies have shown Granger causality with market returns which is having mixed
results. None of the studies have taken into consideration the sectoral indices of the
stock market which represent various Sectors of the economy as they contain stock of
sector-specific industries of that sector.
This research differs from previous literature, first, it considers the causality
relationship with Domestic individual investors which is not studied under a bifurcated
lens. Only the consolidated data of DII is used for every study in the Indian context.
Secondly, no study has found a relationship between DII with the sectoral indices.
Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 186

Thirdly strength of the relationship between the DII and sectoral indices of the national
stock exchange has not been studied with the new linear causality technique of the Toda
Yama motto. Fourthly a unique data set of four types of institutional investors is taken
for the study.
3. Data and Methodology
The study investigates the dynamics of the connection between sectorial stock market
indices of the national stock exchange (NSE) and the DII trading in the NSE. The
required data for the study i.e. the Domestic institutional investors flow in the national
stock exchange is collected from the “nseinfobase”. The DII flow consists of monthly
data of financial institutions (FI), insurance companies (IN), Venture capital funds
(VC), and Mutual funds (MF). The data for nifty Sectoral indices that represent the
performance of the companies belonging to a particular sector is collected from the NSE
website. The closing price of sectoral indices taken under consideration for the study are
NSE100, NSE200, NSE500, NSEAuto, NSEBank, NSEFMCG, NSEIT, NSEMedia,
NSEPharma, NSEPrivateBank, NSEreality, the data is collected from a period of March
2009 to April 2019 monthly. Log form of every variable is used in the study.
In opposition to most of the studies which apply the Granger (1988) linear causality
test, this study has utilized the procedure for causality as given by Toda and Yamamoto
(1995). This test is particularly very useful for the time series, which has a small sample
size and is suitable for time series where the order of integration is not the same among
the series. If the order of integration of any series is more than two, then also this test
can be applied. One more advantage of using Toda and Yamamoto's (1995) testing
process is that it does not require that one should know the order of integration of the
variable until the order of integration exceeds the true LAG length of the model. This
procedure directly performs the test on the coefficients of the levels of VAR, which
helps in minimizing the risk of a wrong reorganization of integration order and the
presence of a cointegration relationship (Giles, 1997).
The fundamental idea in this linear approach is augmenting artificially the right order
of the VAR model, which is represented by k, and the maximum suitable integration
order of the time series,d, which are the extra lags. So, in the beginning, it is needed to
determine the maximum integration order of the series under study, say, dmax. After that
optimum LAG length of the VAR model is required to be determined with the help of
various information criteria given. There are several information criteria given to
determine the appropriate LAG length for the VAR model for example Akaike
Information Criterion (AIC), Schwarz Information Criterion (SC), Final Prediction
Error (FPE), and Hannan-Quinn (HQ).In this paper, the AIC criterion is used for
considering the LAG length as in a small sample this criterion is best suited. In the next
step, the(p=k+dmax)th order of VAR is to be calculated with the help of seemingly
unrelated regression (SUR).
In the end, using Wald statistics, the null hypothesis of no causality needs to be
tested. It is necessary to link two variables in a bivariate system while implementing
Toda and Yamamoto approach to Granger causality, which is done s follows:
 187 Iranian Economic Review, 2023, 27(1)

(1)

where, [ ] [ ] and
( )
The Augmented levels of VAR(p=k+dmax) need to be estimated to test the null
hypothesis of no causality.
(2)
SUR technique is utilized to estimate the augmented VAR system. The null
hypothesis used in the study is:
H1: Y2t does not cause Y1t i.e
H2: Y1t does not cause Y2t,i.e
The above two hypotheses need to be tested with the help of the Wald test. The Wald
statistics (W) holds an asymptotic χ2 distribution with k degrees of freedom. The
remaining dmax autoregressive parameter is ignored in testing Granger causality because
it aids to overcome the issue of non-standard asymptotic properties related to the
standard Wald test for integrated variables.
3.1 Confirmatory Analysis
To start with the causality analysis, the first step is to find out the order of integration of
the variables required for this analysis. The series taken understudy need to be tested for
stationarity with the help of the unit root test. Augmented Dickey-Fuller (ADF) holds
the null hypothesis that the series has a unit root and hence if the P-value comes
significant the series is stationary. Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test is
also used to test the order of integration of the series, which has a null hypothesis that
the series is stationary. The KPSS test was developed by (Kwiatkowski et al., 1992),
who proclaims that his test is meant to complement other tests meant for checking the
order of integration. By doing both tests we can determine the series which seems to be
stationary, the series which seems to have a unit root, and the series for which the data
or the test are not sure whether it is stationary or have a unit root. This will help in
taking correct inferences about the time series data and is known as “confirmatory
analysis”. If the null of the ADF test is rejected (accepted) and if the null of the KPSS
test is accepted (rejected), then it means that the series is stationary (non-stationary). If
both the null hypothesis is accepted (rejected), then we cannot confirm the results.
3.2 Correlation Analysis
The use of Correlation analysis is done in the study to know the contemporaneous
relation between the mutual funds, insurance companies, financial institutions, and
venture capital funds Vis á Vis the sectoral indices of the national stock exchange.
Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 188

4. Empirical Findings
The rationale for operating a unit root test is to find out the additional lags required to
be attached in the VAR(vector autoregressive) model while conducting the Toda
Yamamoto test.
Table 1. Augmented Dickey-Fuller (ADF) Test
variables ADF I(0) ADF I(I) Order of integration
-2.019029 -4.714038
Logfi I(1)*
(-3.488063) (-3.489117)
-0.179539 -3.862521
Login I(1)*
(-3.489659) (-3.489659)
-2.232558 -5.769962
Logvc I(1)*
(-3.489117) (-3.489659)
0.806706 -5.457271
Logmf I(1)*
(-3.489659) (-3.489659)
-2.091315 -16.73057
Logn100 I(1)*
(-3.486551) (-3.486551)
-2.064003 -16.45669
Logn200 I(1)*
(-3.486551) (-3.486551)
-2.045309 -16.33365
Logn500 I(1)*
(-3.486551) (-3.486551)
-3.004990 ________
Lognauto I(0)**
(-2.886074)
-1.920704 -14.82286
Lognbank I(1)*
(-3.486551) (-3.486551)
-2.335301 -17.15057
Lognfmcg I(1)*
(-3.488585) (-3.486551)
-3.202398 _________
Lognit I(0)**
(-2.886074)
-2.332991 -14.92758
lognmedia I(1)*
(-3.486551) (-3.486551)
-3.026022 _________
lognpharma I(0)**
(-2.886074)**
-1.852749 -14.97740
lognprivatebank I(1)*
(-3.486551) (-3.486551)
-2.121806 -12.58058
lognreality I(1)*
(-3.486064) (-3.486551)
Source: Research findings.
Notes: Figures given in the table are t-statistic and values in parenthesis are the
table values of t-stats. *,**,*** specify the statistical significance at 1%, 5%
and 10% level respectively.
Table 2. KPSS Unit Root Test
Order of integration
Variables KPSS
KPSS
0.063484
Logfi I(1)
(0.739000)
0.141226
Login I(1)
(0.739000)
22.00000
Logvc I(1)
(0.739000)
5.000000
Logmf I(1)
(0.739000)
0.209789
Logn100 I(1)
(0.739000)
0.192751
Logn200 I(1)
(0.739000)
 189 Iranian Economic Review, 2023, 27(1)

Order of integration
Variables KPSS
KPSS
0.194460
Logn500 I(1)
(0.739000)
0.492513
lognauto I(1)
(0.739000)
0.191328
Lognbank I(1)
(0.739000)
0.435103
Lognfmcg I(1)
(0.739000)
0.328311
lognit I(1)
(0.739000)
0.217005
lognmedia I(1)
(0.739000)
0.625485
lognpharma I(1)
(0.739000)
Lognprivate 0.241474
I(1)
bank (0.739000)
0.072995
lognreality I(1)
(0.739000)
Source: Research findings.
Notes: Figures given in the table are t-statistic and
values in parenthesis are the table values of t-stats.
Table 3. Confirmatory Analysis
Order of integration Order of integration
Variables Decision
ADF KPSS
Logfi I(1)* I(1) Conclusive (non-stationary)
Login I(1)* I(1) Conclusive (non-stationary)
Logvc I(1)* I(1) Conclusive (non-stationary)
Logmf I(1)* I(1) Conclusive (non-stationary)
Logn100 I(1)* I(1) Conclusive (non-stationary)
Logn200 I(1)* I(1) Conclusive (non-stationary)
Logn500 I(1)* I(1) Conclusive (non-stationary)
lognauto I(0)** I(1) Inconclusive
Lognbank I(1)* I(1) Conclusive (non-stationary)
Lognfmcg I(1)* I(1) Conclusive (non-stationary)
lognit I(0)** I(1) Inconclusive
lognmedia I(1)* I(1) Conclusive (non-stationary)
lognpharma I(0)** I(1) Inconclusive
Lognprivate bank I(1)* I(1) Conclusive (non-stationary)
lognreality I(1)* I(1) Conclusive (non-stationary)
Source: Research findings.
Notes: *,**,*** specify the statistical significance at 1%,5%, and 10% levels respectively.

The confirmatory analysis shown in Table 3 is constructed from the two-unit root test
as can be seen in Tables 1 and 2. The results of the confirmatory analysis reveal that the
variable is stationary at integration order one. Three variables of Auto, IT, and Pharma
are coming inconclusive. So, in VAR models one extra Lag will be added when
running the Toda Yamamoto model for Wald causality in the financial institution (FI),
insurance companies(IN) mutual fund(MF), and venture capital fund(VC).
In addition to Dicky fuller test for unit root, Zivot and Andrews (1992) endogenous
structural break test is used for finding out any structural break in data. It is a sequential
Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 190

test that utilizes the full sample and uses a different dummy variable for each possible
break date. The break date is selected where the t-statistic from the ADF test of the unit
root is at a minimum (most negative).
Consequently, a break date is chosen where the evidence is least favorable for the unit
root null. Literature shows that the presence of a structural break in data can lead to
misleading hypothesis results and can reduce the power of the unit root test. For Zivot
and Andrews test if the test is not rejected, then the null hypothesis implies the presence
of stationarity in data. Table 4 presents the test results of the Zivot and Andrews test,
which shows the structural break in monthly data of NSE sectoral indices and four
domestic institutional investors FI, MF, VC, and IN.
Table 4. Results of Zivot Andrew test
Zivot Andrew test
Variables
Trend and intercept
logfi 2015M08
login 2011M05
logvc 2016M10
logmf 2012M11
Logn100 2011M08
Logn200 2011M08
Logn500 2014M05
lognauto 2014M05
lognbank 2011M08
lognfmcg 2012M07
lognit 2013M07
lognmedia 2017M03
Lognpharma 2014M07
Lognprivate bank 2014M05
lognreality 2013M06
Source: Research findings.

The structural breaks given in the list are significant in the context of India. In 2011
there was a sharp drop in the stock markets across the united nations, the Middle East,
Europe, and Asia due to fear of the contagion effect of the European sovereign debt
crisis. After the Subprime crisis and European sovereign debt, crisis markets were
hugely undervalued, and in 2012, the Indian stock market gave the second-highest result
globally. In 2013 September again market caught pace due to the announcement of Mr
Narendra Modi as the prime ministerial candidate by the Bhartiya Janata party in India.
The Win of Mr. Narendra Modi8 in 2014 increased the confidence in the retail as well as
the domestic investors in stock markets. Domestic investors shifted their investments
from traditional real estate and gold to the stock markets. The colossal money of
investors pooled in mutual funds. In the year 2015, stock markets crashed due to the
ripple effect created by the fears over a slowdown in China created due to the
devaluation of its currency. Demonetization was the major jolt to the stock markets in
2016 November, but the effect diminished gradually. In February 2017 finance minister
Mr Arun Jaitley announced the long-term capital gains tax on the sale of equity
investment which led to the withdrawal of money from the stock market of India by
 191 Iranian Economic Review, 2023, 27(1)

foreign institutional investors and gave a significant negative impact on the stock
markets of India. After checking the stationarity or order of integration of the variable,
the Andrews Zivot test was performed for any structural break in data. The next step is
to check the optimum Lag order for the VAR model according to the several
information criteria given. The paper considers the AIC criterion for the lag order
selection as in the maximum cases, all information criteria gave the same results, but the
value for AIC is minimum, so the AIC criterion is considered. The residual of the
selected Lag order of the VAR is checked by applying the LM-test for serial
independence against the alternative of AR,(k)/MA(k) for k=1….12. If the LM test has
problems of serial correlation, then the lag order can be increased to maximum lag
length as shown by the information criterion until the serial correlation is removed. The
inverse AR root table is checked for the results which should show that the VAR is
stable then only we can move forward for the Wald test for causality.
Now for the confirmation of the long-term relationship between the two variables
Johansen’s cointegration test is applied(Søren Johansen, 1990). The two test statistic,
which is known as trace statistics and eigen-value statistics are used to investigate the
cointegrated vectors. Whatever the outcome of the cointegration test, but the outcome of
the Toda Yamamoto test is not affected by it.
The final step is to verify the Wald test of causality test. Toda and Yamamoto
include the inclusion of dmaxextra lags of the twain variable used in causal relation to
control for the possible cointegration. The extra lag is treated as the exogenous variable,
and coefficients of these lags are not included when subsequent Wald test is conducted.
If the coefficient of extra lags is included in the Wald test then Wald statistics would not
have its usual asymptotic chi-square null distribution. Toda Yamamoto's causality
results are shown in Tables 5 and 6.
Table 5. Toda Yamamoto Causality Results
Dependent Variable: nifty100
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-9.208481 7 Stable 0.1421 no 25.57315 0.0006*
institution
Insurance
-10.3859 7 Stable 0.9060 no 23.07394 0.0033*
companies
Mutual fund -10.57482 8 Stable 0.7092 no 36.86483 0.0000*
Venture capital -8.324558 2 Stable 0.4408 at lag 4 no 0.253273 0.8811
Dependent Variable: Nifty 200
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-9.186475 7 Stable 0.1126 no 24.99592 0.0008*
institution
Insurance
-10.37552 8 Stable 0.9298 no 25.75370 0.0012*
companies
Mutual fund -10.58246 8 Stable 0.5997 no 41.00577 0.0000*
Venture capital -8.299565 2 Stable 0.5163 at lag 4 no 0.308328 0.8571
Dependent Variable: Nifty 500
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-9.146126 8 Stable 0.7552 no 23.09222 0.0032*
institution
 Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 192

Insurance
-10.37901 8 Stable 0.9616 no 25.94125 0.0011*
companies
Mutual fund -10.58925 8 Stable 0.5802 no 41.88724 0.0000*
Venture capital -8.294583 2 Stable 0.4672 at lag 4 no 0.256117 0.8798
Dependent Variable: nifty auto
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi square Prob.
Financial
-8.890804 8 Stable 0.8353 no 14.79018 0.0634***
institution
Insurance
-10.14548 8 Stable 0.8505 no 13.92136 0.0838***
companies
Mutual fund -10.36293 8 Unstable 0.3171 no __________ ________
Venture capital -8.221901 2 Stable 0.8152 at lag 4 no 0.141668 0.9316
Dependent Variable: Nifty bank
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi square Prob.
Financial
-8.828669 7 Stable 0.2917 no 28.06964 0.0002*
institution
Insurance
-10.10843 8 Stable 0.9699 no 26.90297 0.0007*
companies
Mutual fund 8 Stable 0.4472 no 42.93045 0.0000*
Venture capital -7.980624 2 Stable 0.0599 no 0.373915 0.8295
Dependent Variable: nifty FMCG
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi square Prob.
Financial
-8.938804 6 Stable 0.1369 at lag 7 no 8.770837 0.1869
institution
Insurance
-10.20847 8 Stable 0.6857 no 6.706468 0.5686
companies
Mutual fund -10.37924 8 Stable 0.6012 no 9.625070 0.2923
Venture capital -8.328758 2 Stable 0.2589 no 0.289901 0.8651
Dependent Variable: nifty IT
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-9.119219 8 Stable 0.3650 no 8.678553 0.3701
institution
Insurance
-10.32335 8 Stable 0.9889 no 5.674023 0.6914
companies
Mutual fund -10.43646 8 Stable 0.9729 no 10.72259 0.2179
Venture capital -8.583458 2 Stable 0.9252 at lag 4 no 0.434265 0.8048
Dependent Variable: Nifty media
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-8.772013 8 Stable 0.9596 no 12.91793 0.1147
institution
Insurance
-10.07052 8 Stable 0.7323 yes 23.24685 0.0031*
companies
Mutual fund -10.23326 8 Stable 0.5000 no 28.61759 0.0004*
Venture capital -8.036327 2 Stable 0.3120 no 0.097301 0.9525
Dependent Variable: Nifty Pharma
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-8.950553 8 Stable 0.8189 no 14.25482 0.0754***
institution
Insurance
-10.20386 8 Stable 0.8177 no 3.630347 0.8888
companies
Mutual fund -10.35110 8 Stable 0.9152 no 10.13087 0.2560
Venture capital -8.373025 2 Stable 0.4844 at lag 4 no 0.031935 0.9842
Dependent Variable: Nifty private bank
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-8.824739 8 Stable 0.2546 no 22.23957 0.0045*
institution
 193 Iranian Economic Review, 2023, 27(1)

Insurance
-10.08733 8 Stable 0.9539 no 21.66654 0.0056*
companies
Mutual fund -10.27793 8 Stable 0.3551 no 34.64034 0.0000
Venture capital -8.039893 2 Stable 0.0738 no 0.125591 0.9391
Dependent Variable: Nifty reality
Block Exogeneity Wald test
AIC lag AR-Root LM-test cointegration
Chi-square Prob.
Financial
-8.351794 7 Stable 0.1889 no 18.63949 0.0094*
institution
Insurance
-9.677631 8 Stable 0.8936 yes 23.16433 0.0032*
companies
Mutual fund -9.901225 8 Unstable 0.6863 no
Venture capital -7.785794 2 Stable 0.0675 no 1.220854 0.5341
Source: Research findings.
Notes: *,**,*** specify the statistical significance at 1%,5%, and 10% levels respectively.
Table 6. Toda Yamamoto Causality Results
Dependent Variable: Mutual fund
AR- Block Exogeneity wald test
AIC lag LM-test cointegration
Root Chi-Square Prob.
Nifty100 -10.57482 8 Stable 0.7092 no 12.60934 0.1260
Nifty200 -10.58246 8 Stable 0.5997 no 12.31768 0.1376
Nifty 500 -10.58925 8 Stable 0.5802 no 12.56737 0.1276
Nifty Auto -10.36293 8 unstable 0.3171 no
0.0587*
Nifty Bank -10.26700 8 Stable 0.4472 no 15.02356
**
Nifty FMCG -10.37924 8 Stable 0.6012 no 12.72417 0.1217
0.0667*
NiftyIT -10.43646 8 Stable 0.9729 no 14.63271
**
0.0321*
Nifty media -10.23326 8 Stable 0.5000 no 16.81323
*
Nifty Pharma -10.35110 8 Stable 0.9152 no 7.206499 0.5145
Nifty Private
-10.27793 8 Stable 0.3551 no 15.54267 .0494**
Bank
Nifty reality -9.901225 8 unstable 0.6863 no
Dependent Variable: Insurance Companies
Block Exogeneity wald test
AR-
AIC Lag LM-test cointegration
Root Chi-Square Prob.
Nifty100 -10.3859 7 Stable 0.9060 no 3.558285 0.8946
Nifty200 -10.37552 8 Stable 0.9298 no 3.074961 0.9296
Nifty 500 -10.37901 8 Stable 0.9616 no 2.283837 0.9711
Nifty Auto -10.14548 8 Stable 0.8505 no 3.790371 0.8755
Nifty Bank -10.10843 8 Stable 0.9699 no 2.778494 0.9475
Nifty FMCG -10.20847 8 Stable 0.6857 no 3.599826 0.8913
NiftyIT -10.32335 8 Stable 0.9889 no 9.654375 0.2901
Nifty media -10.07052 8 Stable 0.7323 yes 3.471525 0.9014
Nifty Pharma -10.20386 8 Stable 0.8177 no 2.708751 0.9513
Nifty Private
-10.08733 8 Stable 0.9539 No 2.125482 0.9769
Bank
Nifty reality -9.677631 8 Stable 0.8936 yes 2.638374 0.9550
Dependent Variable: Financial Institutions
AR- Block Exogeneity wald test
AIC Lag LM-test cointegration
Root Chi-Square Prob.
Nifty100 -9.208481 7 Stable 0.1421 no 7.349595 0.3934
Nifty200 -9.186475 7 Stable 0.1126 no 7.341531 0.3942
Nifty 500 -9.146126 8 Stable 0.7552 no 6.324534 0.6109
 Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 194

Nifty Auto -8.890804 8 Stable 0.8353 no 4.986893 0.7590

Nifty Bank -8.828669 7 Stable 0.2917 no 7.157082 0.4127
0.1369
Nifty FMCG -8.938804 6 Stable no 5.961202 0.4276
at lag 7
NiftyIT -9.119219 8 Stable 0.3650 no 11.95574 0.1532
Nifty media -8.772013 8 Stable 0.9596 no 6.397979 0.6027
Nifty Pharma -8.950553 8 Stable 0.8189 no 3.977962 0.8591
Nifty Private
-8.824739 8 Stable 0.2546 no 5.476240 0.7075
Bank
Nifty reality -8.351794 7 Stable 0.1889 no 1.353137 0.9870
Dependent Variable: Venture Capital
AR- MAX Block Exogeneity wald test
AIC Lag LM-test cointegration
Root lag Chi-Square Prob.
0.4408 at
Nifty100 -8.324558 2 Stable 6 no 1.836317 0.3993
lag 4
0.5163 at
Nifty200 -8.299565 2 Stable 6 no 1.5234462 0.1669
lag 4
0.4672 at
Nifty 500 -8.294583 2 Stable 6 no 1.379018 0.5018
lag 4
0.8152 at
Nifty Auto -8.221901 2 Stable 6 no 0.503950 0.7773
lag 4
Nifty Bank -7.980624 2 Stable 0.0599 6 no 1.927806 0.3814
Nifty FMCG -8.328758 2 Stable 0.2589 6 no 1.110847 0.5738
0.9252 at
NiftyIT -8.583458 2 Stable 6 no 0.061386 0.9698
lag 4
Nifty media -8.036327 2 Stable 0.3120 6 no 0.940604 0.6248
0.4844 at
Nifty Pharma -8.373025 2 Stable 6 no 2.400441 0.3011
lag 4
Nifty Private
-8.039893 2 Stable 0.0738 6 no 1.535701 0.4640
Bank
Nifty reality -7.785794 2 Stable 0.0675 6 no 0.543329 0.7621
Source: Research findings.
Notes: *,**,*** specify the statistical significance at 1%,5%, and 10% levels respectively.
Table 7. Cointegration Results
Cointegration Results with Insurance Companies
0.05 Max- 0.05
Hypothesized Eigen Trace
Critical Prob.** Eigen Critical Prob.**
No. of CE(s) value Statistic
Value Statistic Value
Nifty None * 0.122089 15.76324 12.32090 0.0127 14.45337 11.22480 0.0131
media At most 1 0.011731 1.309868 4.129906 0.2950 1.309868 4.129906 0.2950
Nifty None * 0.109885 16.70954 12.32090 0.0087 12.92096 11.22480 0.0249
Reality At most 1 0.033555 3.788573 4.129906 0.0612 3.788573 4.129906 0.0612
Source: Research findings.
Notes: Figures given in the table are t-statistic and values in parenthesis are the table values of t-stats.
*,**,*** specify the statistical significance at 1%,5% and 10% level respectively.

Johansen cointegration test results for the above data are shown in Table 7. The null
hypothesis of no cointegration is rejected at a 5 percent level of significance by both the
test of maximum eigen value and trace as shown in the findings. One cointegrating
equation is indicated by both tests. So we can conclude based on Johansen's
cointegration test that there exists a sustainable long-run relationship between insurance
 195 Iranian Economic Review, 2023, 27(1)

companies vis á vis nifty media and nifty reality. This test guarantees causality in at
least one direction.
The results of the Toda Yamamoto non-causality test show that Causality runs from
financial institutions (FI) to Nifty 100, Nifty 200, Nifty 500, Nifty bank, Nifty private
bank, and Nifty reality at 99% level of confidence and FI to Nifty Auto and Nifty
Pharma at 90% level of confidence. As far as insurance companies (IN) are concerned
causality runs from them to Nifty 100, Nifty200, Nifty500, Nifty Bank, Nifty media,
Nifty private bank, Nifty reality at a 99% level of confidence, and Nifty Auto at 90%
level of confidence. IN also shows a long-run relationship between Nifty media and
Nifty reality as there is one cointegration equation coming significantly in both cases.
At the same time, causality runs from mutual funds (MF) to Nifty100, Nifty200,
Nifty500, Nifty Bank, Nifty media, and Nifty private bank at 99% level of confidence.
There is no causality running from venture capital funds to any of the sectoral indexes.
Mutual funds on the other hand are having a bidirectional relationship with Nifty media,
Nifty private bank at a 95% level of confidence as well as Nifty bank at a 90% level of
confidence. A unidirectional causality is running from Nifty IT to mutual funds at a
90% level of confidence.
Thus the outcome shows that Causality is flowing from FI, IN, and MF to most of the
sectoral indices of the national stock exchange but only mutual funds are affected by
some of the sectoral indices whereas there is no causality shown from VC’s to any of
the indexes. These results are consistence with the results of Arora (2016) where the
VAR results of DII with stock returns show a positive effect on stock returns.
Table 8. Correlation Results
Financial Insurance Mutual Venture
Sectoral Indices
institution companies funds capital
Nifty100 0.782205* 0.951158* 0.923151* 0.0934393
Nifty200 0.783313* 0.949709* 0.931513* 0.084940
Nifty500 0.780370* 0.952309* 0.936109* 0.083533
Nifty Auto 0.706664* 0.942088* 0.859706* 0.100728
Nifty bank 0.791374* 0.952920* 0.925031* 0.100718**
Nifty FMCG 0.671798* 0.904439* 0.803297* 0.153752
Nifty IT 0.721170* 0.896874* 0.818330* 0.079379
Nifty Media 0.678594* 0.903534* 0.867862* 0.052407
Nifty Pharma 0.550150* 0.809081* 0.680168* 0.148981**
Nifty Private bank 0.754530* 0.962551* 0.914833* 0.118333
Nifty reality -0.002542 -0.3430779* -0.168326 -0.255782*
Source: Research findings.
Notes: figures given in the table are correlation coefficients.
*,**,*** specify the statistical significance at 1%, 5% and 10% level respectively.

The results of correlation analysis depict that there is a significant contemporaneous

Positive correlation with MF, IN, FI, and VC vis á vis the sectoral indices of India. It is
the nifty reality which is showing a negative correlation with all the DII’s. The
correlation coefficients are quite high in the case of FI, IN, and MF, which supports the
results of Toda Yamamoto Causality. The venture capital fund correlation is also
Domestic Institutional Investors and Sectoral Indices…/Srivastava and Varshney 196

positive, but the coefficient of correlation is very low, making the relationship very
weak, with sectoral indexes.
5. Conclusion
This paper investigates the Causality between the flows of Mutual funds, insurance
companies, financial institutions, and venture capital fund Vis á Vis the sectoral indices
of the national stock exchange. This study is new in the sense that it uses a broad
definition of the domestic institutional investors of India. To study the causality, a
modified version of the Granger causality test is used, which is Toda & Yamamoto,
(1995). The findings indicate unidirectional causality running from FI and IN to Nifty
100, Nifty 200, Nifty 500, Nifty Bank, Nifty Private Bank, and Nifty Reality. In
contrast, FI is also causing Nifty Auto and Nifty Pharma, on the other hand, IN is
causing Nifty Media also. The results of MF is showing causality from MF to Nifty 100,
Nifty 200, Nifty 500, Nifty Bank, Nifty Private Bank, and Nifty Media. In contrast,
causality is also running from some of the sectoral indices to MF (Nifty Media, Nifty
private bank, Nifty Bank, Nifty IT). VC’s are showing no causality to any of the
sectoral indices, or any of the sectoral indices are not showing causality to VC’s. This
implies that DII investments are causing the closing price of the sectoral indices.
Correlation analysis is used in this study to find the magnitude of the relationship
between DII’s and sectoral indices, which came out to be positive and strong. The only
exception is the nifty reality with a negative correlation. In addition to this venture
capital funds showed a positive but weak correlation with the indices.
Cointegration is only coming in the case of insurance companies with the Nifty media
and Nifty reality which confirms the long-run relationship between the two. The results
of correlation analysis are showing a high positive correlation with all the sectoral
indices except the nifty reality, which is showing a negative correlation with the DII’s.
The correlation of the venture capital funds with all the indices is positive but very
weak.
These results illuminate the vital role played by domestic institutional investors in
Indian stock markets. Over the period, the DII investment participation is increasing in
the Indian stock market. Their participation in NSE increased to 13.78 percent by value
as on 30 June 2019. The gap between investments of FPI (foreign portfolio investors)
and DII has been shrinking (Summary, 2019). More and more participation of DII’s in
India’s stock market is increasing the stability of the stock markets as it is the DII’s
which stabilize the stock market when volatility is created by FII’s. Their increased
participation will strengthen the stock markets and insulate them from any shocks
coming from other foreign stock markets. In this context, the role of policymakers
becomes crucial. They should make policies so that the participation of DII’s could be
increased in the markets in turn, making the markets stable from external shocks. DII’s
are limited investors; they can only invest up to a limit in the stock markets. Especially
the pension funds, insurance companies, and financial institutions. As the results are
showing the importance of their contribution to stock markets, it is desired from the
policymakers to devise desirable rules to increase the investment corpus of DII.
 197 Iranian Economic Review, 2023, 27(1)

Policymakers require an uninterrupted supervision method to differentiate between

market response to basic principles vis á vis transitory forces so that financial firmness
of the stock markets can be ensured while obtaining constructive advantage of the
causal relationship running from DII’s to Sectoral indices.
Funding: This study received no financial support.
Competing Interests: The authors declare that they have no competing interests.
Acknowledgment: All authors contributed equally to the conception and design of the
study

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Endnotes
1. The NIFTY 500 Index represents about 96.1% of the free float market capitalization of the stocks listed on NSE as
on March 29, 2019.
2. The NIFTY 200 Index is designed to reflect the behavior and performance of large and mid-market capitalization
companies. NIFTY 200 includes all companies forming part of the NIFTY 100 and NIFTY Full Midcap 100 index.
3. NIFTY 100 represents the top 100 companies based on full market capitalization from NIFTY 500. This index
intends to measure the performance of large market capitalization companies. The NIFTY 100 tracks the behavior of
the combined portfolio of two indices viz. NIFTY 50 and NIFTY Next 50.
4. Bombay stock exchange (BSE) is a major stock exchange in India. BSE 100 is an index of the top 100 companies
trading in BSE.
5. BSE Sensex is the index of the top 30 companies trading on the Bombay stock exchange in India.
6. Several Eurozone member states were unable to repay by refinancing their government debt or bailing out
overindebted banks under their national supervision.
7. The Hindu Business Line. (2012). Retrieved from
https://www.thehindubusinessline.com/economy/indian-stocks-gave-2nd-highest-returns-globally-in-2012-
survey/article23097141.ece
8. Vasudevan, N. (2019). Sensex returns 9.37% per year since 2014. Retrieved from
https://economictimes.indiatimes.com/markets/stocks/news/sensex-returns-9-37-per-year-since-
2014/articleshow/68770758.cms?from=mdr