In order to investigate directionality between stock market and foreign investment, a comprehensive study is applied including two facets of developing stock market visualized stock market growth and 30 day market volatility of Indian stock exchanges – Bombay Stock Exchange and National Stock Exchange. For foreign investment, three types of foreign investment – direct (FDI), indirect or institutional (FII) and depository receipt (such as ADR) are included in the study. Along with foreign investment variables, economic growth is also included. Through multiple regression, a strong link is obtained for investment and economic growth with the stock market growth. In terms of volatility, foreign speculators are found risk aversive. After obtaining strong relation, Granger causality is applied on individual relationship, followed by test of exogeneity. Through these two tests, it is proved that stock market growth is playing lead role with respect to economic growth as well as foreign investment; whereas 30 days volatility has no causal relationship either with foreign investment or with economic growth.

Aizenman, J., & Marion, N. (1999). Volatility and investment: Interpreting evidence from developing countries. Economica, 66(262), 157-179.
Aizenman, J., & Noy, I. (2006). FDI and trade —Two-way linkages? The Quarterly Review of Economics and Finance, 46, 317-337.
Altinay, G., & Karagol, E. (2004). Structural break, unit root, and the causality between energy consumption and GDP in Turkey. Energy Economics, 26(2004), 985-994.
Bekaert, G., & Harvey, C. R. (2000). Foreign speculators and emerging equity markets The Journal of Finance, 55(2), 565-613.
Bekaert, G., Harvey, C. R., & Lundblad, C. (2005). Does financial liberalization spur growth? Journal of Financial Economics, 77(2005), 3-55.
Bende-Nabende, A. (2002). Globalization, FDI, regional integration and sustainable development: Theory, evidence and policy (1st ed.). Hants, England: Ashgate Publishing Limited.
Bende-Nabende, A., & Ford, J. L. (1998). FDI, policy adjustment and endogenous growth: Multiplier effects from a small dynamic model for Taiwan, 1959-1995. World Development, 26(7), 1315-1330.
Bengoa, M., & Sanchez-Robles, B. (2003). Foreign direct investment, economic freedom and growth: New evidence from Latin America. European Journal of Political Economy, 19, 529–545.
Benos, E., & Weisbach, M. S. (2004). Private benefits and cross-listings in the United States. Emerging Markets Review, 5(2), 217-240.
Borensztein, E., Gregorio, J. D., & Lee, J.-W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45, 115-135.
Caballero, R. J. (1991). On the sign of the investment-uncertainty relationship. American Economic Association, 81(1), 279-288.
Chen, N.-F. (1991). Financial investment opportunities and the macroeconomy. The Journal of Finance, 46(2), 529-554.
Covrig, V., Lau, S. T., & Ng, L. (2006). Do domestic and foreign fund managers have similar preferences for stock characteristics? A cross-country analysis. Journal of International Business Studies 37, 407–429.
Dahlquist, M., & Robertsson, G. (2001). Direct foreign ownership, institutional investors, and firm characteristics. Journal of Financial Economics, 59(2001), 413-440.
Dahlquist, M., & Robertsson, G. (2004). A note on foreigners trading and price effects across firms. Journal of Banking & Finance, 28, 615-632.
Flavin, T. J., & Hurley, M. J. (2002). Explaining stock market correlation: A gravity model approach, The Manchester School Supplement. Oxford: Blackwell Publishers Ltd
Froot, K. A., O'Connell, P. G. J., & Seasholes, M. S. (2001). The portfolio flows of international investors Journal of Financial Economics, 59, 151-193.
Giovanni, J. d. (2005). What drives capital flows? The case of cross-border M&A activity and financial deepening. Journal of International Economics 65, 127– 149.
Granger, C. W. J. (1969). Invvesting causal relatins by econometric models and cross-spectral methods. Econometrica, 37(3), 424-438.
Griffin, J. M., Harris, J. H., & Topaloglu, S. (2003). The dynamics of institutional and individual trading. The Journal of Finance, 58(6), 2285-2320.
Grinblatt, M., Titman, S., & Wermers, R. (1995). Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior. American Economic Review, 85, 1088-1105.
Gujarati, D. N. (1995). Basic Econometrics (3rd ed.). New York: McGraw-Hill, Inc.
Gujarati, D. N. (2006). Essentials of econometrics (3rd ed.). Singapore: McGraw Hill.
Henry, P. B. (2000). Stock market liberalization, economic reform, and emerging market equity prices. The Journal of Finance, 55(2), 529-564.
HP. (2004). BSE: India's biggest and most important stock exchange sharpens its edge: hp adaptive enterprise solution.
Huynh, W., Mallik, G., & Hettihewa, S. (2006). The impact of macroeconomic variables, demographic structure and compulsory superannuation on share prices: The case of Australia. Journal of International Business Studies, 37(5), 687-698.
Javorcik, B. S. (2004). Does Foreign Direct Investment increase the productivity of domestic firms? In search of spillovers through backward linkages. The American Economic Review 94(3), 605-627
Jermann, U. J., & Quadrini, V. (2007). Stock market boom and the productivity gains of the 1990s Journal of Monetary Economics 54(2007), 413–432

Jiang, C. X. (1998). Diversification with American depository receipts: The dynamics and the pricing factors. Journal of Business Finance and Accounting, 25(5 & 6), 683-699.
Kalb, D., Pansters, W., & Siebers, H. (Eds.). (2004). Globalization and development: Themes and concepts in current research (1st ed.). Dordrecht, The Netherlands: Kluwer Academic Publishers.
Karolyi, G. A. (2004). The role of American depositary receipts inthe development of emerging equity markets The REview of Economics and Statistics, 86(3), 670-690.
Ko, K., Kim, K., & Cho, S. H. (2007). Characteristics and performance of institutional and foreign investors in Japanese and Korean stock markets. Journal of the Japanese and International Economies, 21, 195-213.
Kunt, A. D., & Maksimovic, V. (1996). Stock market development and financing choices of firms. The World Bank Economic Review, 10(2), 341-369.
Lahiri, A. K., Sinha, U. K., & Kumar, U. (2004). Report of the committee on liberalisation of foreign institutional investment. New Delhi: Government of India, Ministry of Finance.
Levine, R., & Zervos, S. (1996). Stock market development and long-run growth. The World Bank Economic Review, 10(2), 323-339.
Li, X., & Liu, X. (2005 ). Foreign Direct Investment and economic growth: An increasingly endogenous relationship. World Development 33(3), 393–407.
Maddala, G. S. (1992). Introduction to econometrics (2nd ed.). New York: Macmillan Publishing Company.
Majumdar, S. (2007). A study of international listing by firms of Indian origin. ICRA Bulletin Money and Finance, February, 57-90.
Mehra, Y. P. (1989). Velocity and the variability of money growth: Evidence from Granger-causality tests: Comment. Journal of Money, Credit and Banking, 21(2), 262-266.
Moel, A. (2001). The role of American depositary receipts in the development of emerging markets. Economia, 2(1), 209-273.
Naka, A., Mukherjee, T., & Tufte, D. (1998). Macroeconomic variables and the performance of the Indian stock market . University of New Orleans.
Ndikumana, L. (2005). Financial development, financial structure, and domestic investment: International evidence. Journal of International Money and Finance, 24, 651-673.
Nofsinger, J. R., & Sias, R. W. (1999). Herding and feedback trading by institutional and individual investors Journal of Finance 54, 2263-2295.
Rangarajan, C. (2000). Structural Reforms in Industry, Banking and Finance: A Case Study of India (1 ed.). Singapore: Institute of South East Asian Studies.
RBI. (2003). Foreign investment in India (Vol. DIR 38): World Link.
Reily, F. K., & Brown, K. C. (2003). Investment analysis and portfolio management (7th ed.). Singapore: Thomson North-Western.
Rousson, V., & Gosoniu, N. F. (2007). An R-square coefficient based on final prediction error. Statistical Methodology, 4(2007), 331-340.
Sellin, P. (1996). Investing excess volatility? Opening up a small stock market to international investors. The Scandinavian Journal of Economics, 98(4), 603-612.
Sharma, K. (2000). Export growth in India: Has FDI played a role? : Yale University.
Sims, C. A. (1972). Money, income and causality. The American Economic Review, 62(4), 540-552.
Stock, J. H., & Watson, M. W. (2003). Introduction to econometrics. Boston: Addison Wesley
Thornton, D. L., & Batten, D. S. (1985). Lag-length selection and tests of Grnger causality between money and income. Journal of Money, Credit and Banking, 17(2), 164-178.
Torre, A. d. l., Gozzi, J. C., & Schmukler, S. L. (2007). Stock market development under globalization: Whither the gains from reforms? . Journal of Banking & Finance, 31, 1731–1754.
Vengayil, R. (2004). India’s securities market: A brief history (pp. 37-40): ABN AMRO.
Wermers, R. (1999). Mutual fund herding and the impact on stock prices Journal of Finance, 54, 581-622.
Wong, W.-K., Agarwal, A., & Du, J. (2005). Financial integration for India stock market, a fractional cointegration approach: National University of Singapore.