The Study On Open-end Fund's FPR Of China

Fund performance plays significant roles in fund investor's purchase and redemption decision. Regular and orderly Flow-performance-Relationships(FPR) of open-end funds are important mechanisms to promote fund industry's persistent and healthy development. Related studies find that foreign fund FPR have over-incentive for better peoforming funds but insufficient-punishment for poorer performing funds,while domestic fund FPR have negative incentives for open-end funds. Abroad and domestic literatures are very few, thus further study of Chinese open-end funds FPR has important theoretical significance.From the practical view, China's open-end funds have witnessed rapid development in recent years,with fund number soaring from 3 funds in 2001 to 533 in 2009. Open-end funds increasingly have to compete for fund investor flows between fund peers:on the one hand,new issues of fund lack of fund subscription,on the other hand, most old funds face net redemption. Thus further research funds'FPR, has also very important practical significance in re-shaping the competitive and orderly fund FPR mechanism, and promoting the healthy and sustainable development of open-end fund.The body of this article total of 8 chapters.Chapterâ… is Introduction, and Chapterâ…¡is about literature review. Chapterâ…¢to Chapterâ…§are the main part of the full text.Chapterâ…¡mainly reviewed the theory mechanism behind the fund FPR, including standard finance theory and Fund Performance Persistence, behavioral finance theory, consumer behavior theory.Chapterâ…¢analysized purchase and redemption machanism of open-end fund's invsetors respectively, and made some theoretical assumptions on the relationship between China's open-end fund net redemptions, purchase, redemption and fund performance.Chapterâ…£compared the reform and development of open-end fund investors, and fund characteristics of United States and China. on Characteristics of open-end fund investors,I investigate investors'structure and investor's behavior respectively.Chapterâ…¤tested empirically open-end fund's performance persistence of China,and further make theory hypothesis on the FPR of China's open-end funds.Chapterâ…¥empirically investigated FPR of China's open-end funds from the view of absolute performance with China's open-end fund panel data. First of all, I applied an ordinary panel model to estimate Fund FPR as a benchmark. On this basis, the robust test was conducted and the FPR were further investgated in diferrent economic stages. Major finding is that the net fund redemptions are positively related to performance, and fund purchase, redemption are negatively correlated with fund performance, and "abnormal net redemption" is due to "abnormal purchase,", not due to "abnormal Redemption". Purchase and redemption is highly positively correlated with each other, and short-term investors is the main reason for fund's abnormal FPR. The empirical results are robust. Empirical results in the first bear market is just opposite to that of the total sample,while the conclusion of the next bull and bear market phase are consistant with that of total sample. After Controlling the persistence impact of investment flows, the fund FPR conclusion is still valid. The nonlinear characteristics of the fund FPR were founded in the threshold panel model. The relationship between net redemption of the Fund and fund performance is convex and positive correlated, while the relationship between purchase or redemption and fund performance are concave and negatively correlated. This chapter also further found that equity fund investors is more sensitive than the mixed performance of the Fund; institutional investors is sensitive to past performance, while individual investors are sensitive both to the past performance and to current performance.Chapterâ…¦further empirically investigated FPR of China's open-end funds from the view of relative performance with China's open-end fund panel data. First,I applied DEA method and got conversion efficiency scores from annual inputs, outputs data of open-end funds, and considered the effects of relative performance of DEA on investors'net redemption, purchase, redemption. Second, I applied both non-parameter method and parameter method examines the impact of yearly and quarterly relative performance ratings on investment flows. Empirical results indicate that, whether holding period is a quarter or a year, the fund net redemption is negatively correlated with the relative performance,while purchase and redemption are positiely correlated with relative performance.Chapterâ…§summarized the main conclusions of the text as follows:the fund-quarter absolute performance is not sustainable but significantly reversal; fund-quarter relative performance is sustainable.Whether assessment period is a quarter or a year, the net redemption of fund investors is positively related to fund's absolute performance and negatively related to Fund relative performance; investors' purchase and redemption is negatively related to absolute performance,but positively correlated with fund relative performance, and purchase is more sensitive to fund performance than redemption; short-term operation investors is the main motivation.The empirical results are robust to various performance indicators; the conclusion is still valid after stripping impact of investment flows; fund FPR have nonlinear characteristics, the relationship between net redemption and absolute performance is concave and positively correlated;purchase and redemption are convex and negatively correlated with absolute performance. In addition, this paper also found that stages of economic development, fund style, investors'characteristics, also have significant impact on Fund FPR.From the point of view of absolute performance, there do exist "abnormal net redemption" phenomenon in open-end funds, however it isn't caused by investors' "abnormal Redemption" or "disposition effect", but caused by fund investors' "abnormal purchase" result. From the perspective of relative performance, there is no "abnormal net redemption" phenomenon in open-end funds, and no "abnormal purchase," but there is "abnormal Redemption" or " disposition effect".Conbined with Fund Performance Persistence results, it can be concluded that investors'purchase behavior is rational, and investors'redemption behavior are non-rational,whether they are based on absolute performance or relative performance. "abnormal net redemption" between fund net redemptions and absolute performance, is because absolute performance of open-end funds can't persist but significantly reverse,thus investors gradually losed confidence in fund's future performance; the "positive feedback" relationship between net redemptions and relative performance,is because fund relative performance ranking has significant sustainability,and sophsicated investors will get higher yield through fund information about relative performance. In addition, that purchase positively correlated with redemption, and investors purchase is more sensitive than redemption to Fund's performance, is also an important reason.Investors performance-based purchase behavior quarterly can earn relatively high income with "smart money" effect; while investors'performance-based redemption behavior will be confronted with relatively greater loss. Since the Fund does not have sustainable annual performance rating, investor's purchase and redemption are positively correlated with annual relative performance rankings, so investors'purchase or redemption are informationless invest, it is difficult to judge whether their purchase, redemption will bring benefit or loss.Finally, based on the results of this empirical and theoretical interpretation, the paper put forward some policy recommendations from government, fund companies and investors respectively.Innovations of this paper are as follows:Firstly, this paper constructed theory base for open-end fund's FPR, and studied Fund's absolute and relative performance persistence using dynamic panel method.Secondly,this paper conducted comprehensive empirical test on FPR of China's open-end fund with panel data.I examined different effects of both absolute performance and relative performance on investment flows.I also investigated the interaction between net fund redemptions and absolute performance of the Fund,and distincted between the Fund's short-term investors and long-term investors's different reaction to fund performance. This paper not only examined the impact of fund performance on net redemption, but also examined the impact of fund performance on Fund's purchase, redemption. Fund FPR at different economic cycles stages are also examined. Besides,dynamic panels were conducted to investigate fund FPR after controling the continuing impact of investment flows,and threshold panels are applied to investigate the nonlinear characteristics of Fund's FPR. Moreover, this paper investigated effects of relative performance such as DEA relative performance scores, performance rankings on the investment flows.