The Research Of Anomalies In ETF Market:from The Perspective Of Investors’ Sentiment

Exchange traded fund (ETF) is a passive managed investment fund which is designed to track a particular index and entails lower cost on investors to gain average market return though a special creation/redemption mechanism. Investors around the world have been piling into ETFs ever since their first-day offering and making the magnitude of asset managed by ETFs growing steadily as a result of their special mechanism and well performance. Because of their irreplaceable function in risk management and retail investors protection, ETFs are promoted by governments around the world especially governments of emerging markets to optimize transaction varieties of domestic capital markets, including Japan, Korea, Singapore and Hong Kong. As an implementation measures of "Nine Suggestions", A-share stock market in China launched its first ETF, Shanghai50ETF, at the end of2004. So far, the number of ETFs in A-share stock market has reached30, and the magnitude of managed asset has surpassed70billion RMB. In December of2011,7ETFs including Shanghai50ETF, Shanghai180ETF, Shanghai180Corporate Governance ETF, Shenzhen100ETF, Small and Medium-sized Panels ETF as well as Shenzhen Component ETF, were selected as items of shorting and margin financing in A-share stock market, which indicates a new stage of ETFs development in China and gains academic and practical concerns.Although ETFs realize the mechanism innovation compared with traditional investment funds, they can not avoid being influenced by investors’psychological and behavioral bias, which reflects itself in anomalies of ETFs’market performance. From a worldwide perspective, ETFs present market anomalies similar to traditional close-ended and open-ended funds, such as price deviation to NAV, fund flow volatility and abnormal market reactions around important events. Such anomalies of ETFs also appear in A-share stock market and are more evident than those in foreign stock markets. The explosive development of behavioral finance in90s of last century which has formed a relatively complete theoretical and empirical system offers a powerful tool on the research of investors’psychological and behavioral influence on stock market. However, compared with the fruitful harvest in traditional assets, the research of behavioral finance in ETFs has not been far from consummate, which needs further considerations. As a result, this thesis utilizes various empirical methods to analyze both the characteristics and causes of anomalies of ETFs in A-share stock market from the perspectives of behavioral finance so as to provide evidence to decision-making process of both practical circle and authorities as well as to provide reference to further research of domestic researchers. It is evident that the premium and discount of ETFs in China is within the scope of arbitrage cost, which indicates the arbitrage system functions well in Chinese ETFs market;5earlier launched ETFs and some of industrial and style ETFs present excess volatility form trading prices to NAV, which indicates that noise traders take important proportion in investor structure of those ETFs; Investors sentiment is positively correlated with the premium of the5earlier launched ETFs, which indicates that investors sentiment is an important factor which causes the price deviation of those ETFs. However, investors sentiment does not has significant power in explaining the price deviation of those new ETFs; Investors sentiment is positively correlated with the total fund flow of ETF industry after the global financial crisis, which indicates that investors sentiment could influence asset allocation decision of investors. When sentiment is high, investors tend to allocate more wealth on ETFs, rather than vice versa. However, this kind of relationship between investor sentiment and total fund flow of ETFs does not hold before the global financial crisis; Investors sentiment is also positively correlated with contemporaneous fund flow for individual ETF. Furthermore, Investors sentiment is negatively correlated with fund flow of individual ETF4weeks later. Based on the empirical result above, this thesis gives policy suggestions for promoting ETFs development in A-share stock market, including improving arbitrage mechanism of ETFs, increasing indexing investment varieties, establishing ETFs exit mechanism, completing index system, and optimizing investor structure of A-share stock market.Compared with existing research, the main contributions of this thesis are concluded below:Firstly, this thesis focuses on anomalies of ETFs in A-share stock market so as to extend domestic behavioral finance research from stocks and traditional investment funds to ETFs.Secondly, this thesis utilizes principal components analysis (PCA) to form investor sentiment composite index so as to avoid the negative effects of single measurement of investor sentiment adopted by existing research.Thirdly, this thesis adopts empirical method including ADF test, residual test and coefficient test to modify both variable construction and empirical models so as to avoid the spurious regression problem of existing research.Fourthly, this thesis utilizes time series method to analyze the influence of investor sentiment on ETFs total fund flow, so as to extend the existing research from the relationship between investor sentiment and individual ETF fund flow to that between investor sentiment and total ETFs fund flow.Finally, based on the empirical results and characteristics of ETF market in China, this thesis gives some policy suggestions to promote the further development of ETFs in A-share stock market.