Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 3 https://isni.org/isni/0000000404811396, International Monetary Fund

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1

The financial support of the International Growth Centre, and the Sury Initiative on Global Finance and International Risk Management, is gratefully acknowledged. Vimal Balasubramaniam, Vikram Bahure, Jean Paul Rabanal and Anick Yaha provided excellent research assistance. We greatly benefited from the comments of Subir Gokarn, Rakesh Mohan, Tarun Ramadorai, and two anonymous referees, on earlier drafts. We are grateful to CMIE and SEBI for help on the dataset constructed for this paper. The opinions expressed and remaining shortcomings are our responsibility alone.

2

One has to be careful about causality in the interpretation of the results, since, even though there is temporal directionality that is consistent with so-called “Granger causality,” both variables are endogenous and subject to simultaneous exogenous effects. Rakesh Mohan has commented to us that this statement is not consistent with the large FII outflows and Indian stock market price fall in 2008-09. There are several possible reasons for the difference. First, the level of aggregation and the time scale are completely different when one looks at daily behavior versus annual aggregates. Second, our procedure does “average” across different extreme events, and is not specific to a single temporal episode, such as the worst days of 2008 or 2009..

3

Foreign portfolio investment into India has to be channeled through qualified institutions, which must register with a government agency. These institutions are referred to as FII.

4

The Nifty index is India’s major stock market index, analogous to the S&P 500 index in the US.

5

These are defined to be “countries where the crisis did not originate, with the primary challenge being an upside risk of inflation expectations in goods and asset markets.” They include the emerging market economies, as well as several developed economies.

6

Other examples that apply the event study methodology to international trade and finance questions include Pynnonen (2005) and Manova (2008).

7

Of the over 5000 listed companies, at any point in time, there are no more than 20 firms where FIIs lack headroom for additional purchases. Hence, for almost all firms, the limit of 24 per cent has not been reached, or the shareholder resolution has come about which raises the limit beyond 24 per cent. There are no restrictions on selling or repatriating capital.

8

For institutional details about capital controls and foreign investment into India, see Shah & Patnaik (2007, 2011).

9

Chakrabarti (2006) points out that there is evidence of a structural break in the net FII time-series around April 2003 (and Figure 1 suggests similarly). In our analysis, once net FII investment is rescaled, this problem is addressed (see Figure 2), thus permitting a greater span of the data.

10

We are grateful to Subir Gokarn for emphasizing this point.

11

In general, and not surprisingly, extreme values of returns on the Nikkei 225 index (not reported here) are more highly coincident with the S&P 500 than is the case for the Nifty.

12

In fact, the difference in time patterns between Nifty returns and FII flows is even more striking in the case of 2.5% tails.

13

On the advantages of bootstrap inference in event studies, see, for example, Kothari and Warner (2007), and Lefebvre (2007).

14

The specific approach used here is based on Davison, Hinkley, and Schectman (1986).

15

Details of this simulation, and full source code, are available from the authors on request.

16

For expositional convenience, we refer to a cluster of consecutive extreme events as a single day. In reality, some of the periods may therefore be longer than 11 days in trading time.

17

The asset fire sale analysis discussed in the literature review is an example of an exception to this directional independence of explanations, but it goes in the opposite direction to the pattern observed here.

18

The discussion in footnote 2 is relevant here as well.

19

Thus, the “100 year flood” nature of the global financial meltdown of 2008-09 as it affected domestic markets everywhere is not dismissed as irrelevant, merely recognized as exceptional even in the category of extreme events. We are grateful to Rakesh Mohan for helping us clarify the interpretation of our methodology and results.

Foreign Investors Under Stress: Evidence from India
Author: Ila Patnaik, Ajay Shah, and Mr. Nirvikar Singh