Emerging market policymakers have been concerned about the financial stability implications of financial globalisation. These concerns are focussed particularly on behaviour under stressed conditions. Do tail events in the home country trigger off extreme responses by foreign investors and is there any asymmetry between the responses of foreign investors to very good versus very bad days? Do foreign investors have a major impact on domestic markets through large movements of funds? Do extreme events in world markets induce extreme behaviour by foreign investors, thus making them vectors of crisis transmission? This project examines these questions for India, using a modified event study methodology focussed on tail events in two phases. In the first phase, the authors use daily data for Indian stock market returns, net FII (Foreign Institutional Investment) inflow, the US S&P 500, and the Volatility Index from 2000-2011 – a total of 3,561 observations. In the second phase, daily data on company stock price returns and company-level FII flows for 2,000 firms for the period 2003-2011 is used, along with US S&P 500.

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