A Research On Fund Investment Style Drift And Risk Measure Based On Fractal Market Theory

After the huge strike of U.S. subprime crisis in 2008, global financial industry faced serious challenges. While the role of the United States as a global hegemony in finance began to shake, Asia-centered emerging capital markets rapidly rose. As the largest emerging capital market in Asia,China underwent profound changes in 2010, when stock index futures, margin trading and other short mechanisms increased the depth of the market. The constant issuing innovation of fund-products widened the road for the funds development, which might be expected to become a beautiful landscape in fund industry. In the background of fractal market and financial crisis, how can Chinese fund industry meet the challenge and find new development opportunities-positioning fund products and grasping the soul of product innovation? The development of the U.S. fund market has gone through disorder to order, and then to effective process. At the aspect of product design and position, fund industry has experienced a shift from the product provision to a combination of financial services and product provision; at the aspect of financial goal, the fund investors'pursuit has changed from excess returns to satisfactory returns,and then to risk returns; at the aspect of financial strategy, there has been a conversion from relying on the ability of managers to dependend on investment style philosophy, and then to investment style theory. In today's capital market in Europe and America, philosophy such as investment style and style investment has been fully accepted, and gradually popular. How can the fund-industry development in China transform from quantity to quality? How can the concept of product design and investment style be on the forefront of the world?Foreign research on fund investment style drift began in the early 1990s, which is still a hot issue so far. The research in this field has achieved fruitful results in theory, it also has been widely used in practice. Compared with U.S. fund market, China's fund development just begins to take shape. The funds do not show significant difference in the soul of product design in China. What's more, the investment-style convergence results in style drift in the course of investment operation. It is the fractal characteristic of emerging markets that provides a realistic possibility for fund investment style drift. Contrary to the claimed investment style, fund managers might prefer to the so-called style drift, reflecting an underlying opportunity of short-term excess returns. However, opportunities coexist with risk, and the controllability of the drift risk will become the key factor to the success of style drift. Based on this, this paper use fractal theory to explore investment style drift of the open-end funds.Besides,this paper does a systematic study on the nonlinear characteristic of investment style drift return, and constructs a scientific model to measure the investment style drift risk. The study is expected to offer methods of quantifying the fractal characteristics of investment style drift return and drift risk for regulators, fund companies, fund managers and investors, as well as to provide theoretical guidance for the prosperous development of the fund industry in the future.The main conclusions of this paper are as follows:1.By introducing fractal theory in non-linear science, this paper constructs a theoretical framework of fund investment style in the reality of fractal market, and empirical test finds that: the style asset of China's stock market has a fractal feature of both long memory and invariant scaling and so on;2.Considering fractal characteristics of Chinese capital market, this paper systematically studies the fund investment style drift by recognizing fund investment style based on the box-fractal dimension and analyze fund investment style drift based on elastic-fractal dimension. They draw the same conclusion that the investment style drift is a common phenomenon, which is also consistent with the real fractal market;3.Using sliding window MF-DFA method, this paper carries out multi-fractal analysis on investment style drift return of open-end funds. It is concluded that the investment style drift return shows multifractal characteristics, and found fund market is non-fully effective in China, presenting fractal characteristic to some extent, which provides a realistic feasibility for fund investment style drift;4.The fund investment style drift is a double-edged sword. Along with obtaining short-term excess return, it also reflects the huge style drift risk. This paper measures the investment style drift risk by constructing multifractal volatility MF-VaR model. The result indicates that drift risk is generally high in the open-end funds, which provides theoretical support for regulators to control the serious style drift, as well as to regulate fund products issue and investment behavior.Scholars home and abroad have studied a lot on the fund investment style identification, investment style drift factors and its impact on the fund's performance, but they are all carried out under the linear paradigm based on efficient market theory. Comparatively, research on fund investment style drift and risk measurement under non-linear paradigm based on fractal market theory is still blank.Comparison of the existing research results, innovation and contribution of this paper are as follows:1.This paper introduces fractal theory to revise exploratory research on the field of fund investment style, constructs a fractal analytical framework of fund investment style, and proves that the Chinese stock style asset has a fractal feature of long memory and invariant scaling;2.After comparing the two traditional investment style identification methods, this paper recognizes fund investment style based on the box-fractal dimension(FDSR) and analyzes fund investment style drift based on the elastic-fractal dimension CIS, according to the fractal characteristic of capital market. Compared to the previous identification method, this method is able to avoid style assets having multi-collinearity or lacking T-statistic significant test and other defects;3.This paper proposes analysis the fund investment style drift method based on elastic- fractal dimension, and deduces the computing formula of elastic-fractal dimension.In addition, this paper gives the threshold of investment style drift by mining its economic implications, which provides a new kind of research on fund investment style drift and may become a new tool to measure and control the fund investment style drift risk;4.This paper quantifies fund investment style drift and derives investment style drift return formula. It modifies the traditional MF-DFA and put forword the multi-fractal analysis method of sliding window MF-DFA. The method makes an improvement in data loss and sequence inversion and reduces analysis result error. And use the modified method to analyze the multi-fractal characteristic and spectrum parameter of investment style drift return;5.This paper extracts the multifractal volatility measurement according to multifractal spectrum parameter and singularity exponent, and constructs a MF-VaR model to measure investment style drift risk. This paper uses the MF-VaR model to measure investment style drift risk of 79 open-end funds, whose measurement results are more precise and robust than the latest GARCH family high-level econometric models.