The research is aimed at finding relationship between two key indicators of identifying the health of any economy namely status of foreign investment and stock market returns. The stock exchange return may be indicated by both benchmark index and market cap. It has been observed that these two go hand in hand with almost perfectly positive correlation. Subsequently the relationship between FDI investment and benchmark stock exchange has been tested in the context of two economies- India and Brazil, which are predominantly having strong potential to attract considerable amount of foreign investment. Vector autoregression model (VAR) has been used to identify the relationship followed by lag order selection and identification of lag length. The bidirectional causality has been tested followed by identifying the variables as block exogenous. Impulse and variance decomposition tests have proved the importance of shock of exogenous factors onto the variables. A detailed case study has been performed for India, where Cointegration test significantly concluded strong interdependence between FDI (equity investment), ECB (debt investment) and benchmark stock index (NIFTY 500). The research has been concluded by developing a forecasting model for the benchmark index based on the values of FDI and its own values with first and second lag orders.
FDI, Benchmark Stock Index, Relationship between FDI and NIFTY, FDI and BOVESPA, VAR Model, Cointegration Test, Granger Causality Test, Block Exogeneity Test, Impulse test, Variance Decomposition
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