An Analysis Of Investor's Purchase And Redemption Behavior On The Open-end Fund Market In China

This paper focuses on investor's purchase and redemption behavior on the open-end fund market in China. To explore the factors affecting investor's behavior, I analyze the relation between fund share's rate of change and 10 possible factors such as market return and fund performance, and further examine the rationality of investor's behavior.Three major methods employed here to study the factors contributing to purchase and redemption include multi-stage regression on semi-annual data, regressions with different market trends (bull and bear), and comprehensive regression. The empirical results indicate that market return of last period and growth rate of cumulative average return have significantly positive impact on purchase and redemption as well as net purchase of this period, and that the span of fund's existence and fund's rating are positively correlated with purchase and net purchase but negatively correlated to fund's redemption, and that larger funds have advantage in attracting purchase but not in preventing redemption, and that two factors-household shareholding ratio and fund's unit net asset value-are special in that their relation to purchase and redemption vary in bull and bear markets:in bull market household shareholding ratio is positively correlated to purchase, while unit net asset value is negatively correlated, and vice versa in bear markets.To test the rationality of investor's purchase and redemption behavior, I adopt the cumulative abnormal returns (CAR) model and the FF 3-factor model for direct and indirect tests respectively. The outcome shows little differences between the funds under redemption and the ones on purchase in terms of their performance, demonstrating investor's limited capability in picking quality funds.Therefore, this paper suggests investors think independently and choose, according to their investment goal and risk-bearing capacity, the well-performed and stable-sized fund with moderately concentrated shares for long-term investment, so as to achieve smooth return. To attract investors, the fund management companies should build the database of investor's characteristics, keep a good level of performance, establish their brand name, and set a reasonable charge mechanism. For protecting investor and boosting the development of the fund industry, the regulatory institutions can promote investor education, improve security market structures, enforce transparency and frequency of fund's disclosure of information, and standardize fund's marketing and sales.