Research On The Liquidity Risk Management Of Open-end Fund

The liquidity is the basic attribute of financial asset, and is the fundamental function of financial market as well. Comparing to other ordinary financial institutions, the open-end fund undertakes a higher liquidity risk because of the arrangement of the redemption system. In macrocosm, the liquidity management relates the fund industry, and even the safe operating of the security market. In microcosm, it decides whether the open-end fund can survive and develop or not. These are the core question of the open-end fund that how to adjust liquidity and profitability, and how to control the liquidity risk efficiently.The liquidity risk of the open-end fund mainly includes two aspects: one is the risk of insufficient liquidity; the other is the risk which large amount shares of the fund are redeemed simultaneously. This article attempts to focus on the liquidity risk caused by fund shares redemption and the management problem in the point of view of an open-end fund supervisor. At beginning, it takes liquidity risk management theory and case study of the mature open-end fund market under the analysis frame of "system-behavior-result". Then it tries to make systematic literature review and intensive empirical research, studies the formation mechanism and institutional origin of liquidity risk in accordance with the redemption system, the investor redeeming behavior and the cash flow change thereby, study the policy-making mechanism of investors redeeming behavior, and analyze the effect to cash flow from redeeming behavior in real cases. On the basis of the above, it is going to dissect the liquidity risk and its characteristics of open-end fund in our country, which aims at raising measures to build liquidity risk management system of the open-end fund.As the innovation of the fund industry self-perfection, the redemption system is a "double-edged sword". On the one hand, it has led into competitive mechanism through strengthening the market function, solved some problems in the fund industry principal-agent relationship, formed the effective prompting to fund managers, and made the open-end fund become the mainstream in the fund industry exceeding close-end fund. On the other hand, redemption system has also sharpen the conflict between the profitability and the liquidity, which is the original reason of liquidity risk formed, and even the disastrous liquidity crisis caused in extraordinary cases.Under the redemption system frame, there exists external effect by reason of the investor redeeming behavior. Supposing that the potential income of redeeming investors is higher than the average accumulated unrealized income of fund investors, the external effect of redeeming behavior is negative to other investors. Otherwise, it is positive. Because of the existence of redemption external effect, it causes the seemingly rational individual redeeming behavior may present an irrational result on the community. In recent years, the large area and high proportion redemption phenomenon of open-end fund in our country is actually the compound result of investors' redemption external effect and investors "disposition effect".The cash flow separation test also indicated that the fund sales net inflow is the major influence factor to the fund cash flow. The fund sales amount appears a synchronized tendency with redemption amount entirely. The purchasing rate on the fund of outstanding performance is higher; but the redemption is not punishment on fund of poor performance. Redemption rate is more sensitive to the risk rather than the profitability. There exists strongly positive correlation between the purchase ratio and the redemption ratio. In a mature market, fund investors usually keep a long-time investment and seldom redeem. Consequently, the open-end fund would not emerge into huge vibration with the capital market from purchase or redemption.In our country, the open-end fund liquidity risk has its special formation reason, and the redeeming behavior and redemption condition of the investors also have their certain features. Therefore, the construction of the open-end fund liquidity risk management system in our country should base on the actual situation of our financial market and system. Firstly, we should establish the object, the procedure and the risk forecast and alarm system of the open-end fund. Secondly we should focus on the interior asset and fund management of fund management companies as well as the external system and environment reform, which is for the purpose of optimizing the liquidity risk management and prevention measure. And finally the integrated liquidity risk management system including three stages following as pre-estimation, in the matter monitoring and afterwards appraisal is expected to be accomplished.