THE INFLUENCE OF FPI ON THE BEHAVIORAL BIASES OF DOMESTIC INSTITUTIONAL INVESTORS

Abstract

The study is about the influence of foreign portfolio investment (FPI) on the investment decisions biases of the domestic institutional investors operating in Pakistan Stock Exchange (PSX). These biases include conservatism, overconfidence and herding effect. The influence of FPI flows on the investment decisions of domestic institutional investors is examined by analyzing the primary data, collected through questionnaire from all the Domestic Institutional Investors (DIIs), listed at PSX. The questionnaire comprised of questions, covering three behavioral factors namely overconfidence, conservatism and herding effect in the context of FPI. Results show that influx of FPI has a positive and significant effect on the confidence of local investors and vice versa. DIIs behave conservative due to FPI fluctuations but they do herd positively with the investment decisions of foreign investors. The study provide significant guidance to the domestic investors (both institutional and retail) as well as foreign investors to invest wisely according to the movements in the FPI flows. 

Key Words: Foreign Portfolio Investment (FPI), Domestic Institutional Investors (DIIs), Conservatism, Herding Effect.

JEL Codes: F21,F3, G11, G15, G30