A Theoretical And Empirical Research On ETF

1. Research background and purpose of dissertationIndexing investment, which refers to the replication and tracking a stock market index for the goal, is a pattern which achieves an average return of stock market through the full decentralization and passive management to the smallest of transaction costs. Indexing investment is superior to positive investment in the long-term period by empirical research which indicates the return of 80% positive investment funds is lower than that of the stock market.Along with the continuous development of securities investment funds and stock market index system, the index funds become an important investment tool. The first ETF—SSE 50 ETF successfully issued in November 2004. Since then, there are five ETF, which provide investors with a new investment choice, issued and have made remarkable progress in both size and type in China. Researching on the theory of indexing investment and its applicability in China capital markets has a high value to the investors.According to the introduction of Shanghai Stock Exchange (2004), ETF is a open-end and trading index fund. Investors can trade the ETF shares through the cash account, and create or redeem the ETF share by swapping the stock for ETF shares. The asset of ETF is the same as that of underlying index stock portfolio. ETF follows the passive investment strategy and never change its portfolio stocks if underlying stocks unchanged.The paper analyses the concept and fundamental theory of ETF, and empirically researches on the tracking error and arbitrage behavior of SSE 50 ETF. Firstly, the basic idea is to introduce the history and advantage of indexing investment. Meanwhile, we apply the efficient market hypothesis and modern portfolio theory to explain the reason of fast growth of ETF. Based on the theory, we measure the tracking error of SSE 50 ETF which is the key indicator whether ETF management satisfy its investment goal. Then, applying the arbitrage theory, we explain the decrease shares of SSE 50 ETF in the state share reform period. Eventually, summarize the innovation and shortcomings of dissertation.2. Main contents and structure of dissertationThe full text is divided into six parts. Chapter I introduces the background and status of research, the specific ideas and framework of paper. As a newly generated investment theory, the index investment is still at a development stage, and there are numerous areas worthy of further research.Chapter II introduces the indexing investment. Section I introduces the history of indexing funds. Since 1970s, indexing investment strategy is widely applied all over the world, and indexing funds become an important investing tool.Section II focuses on the advantage of indexing investment, which has the lowest transaction costs as to other funds. Section III finds many empirical literatures indicate the return of indexing funds is higher than that of many positive funds in the long-term period, and the managers of positive funds didn't have the market-timing and stock-choosing capacity. Section IV introduces the ETF, which contains the advantage of indexing investment, open-end funds and closed-end funds.Chapter III introduces the efficient market hypothesis and modern portfolio theory. Section I analyses the efficient market theory, which thinks all the information reflects in the stock prices and investors can't continuously achieve return than that of stock market. Investors should take the passive investment and buy-and-hold strategy. Since 1980s, there are many economic facts that violate the efficient market hypothesis, but it doesn't mean investors can continuously earn extra return because of arbitrage behavior. Section II introduces the efficient test of our stock market. There is no consensus about our stock market efficient, but as the development of stock market, many empirical literatures believe our stock market is close to weak efficient market. Section III introduces the modern portfolio theory. We believe market index is the best stock portfolio, and the indexing investment fund is a good investment tool for investors.Chapter IV analyses the tracking error of ETF. Section I introduces the tracking error. Because of transaction costs, the return of ETF doesn't be equal to that of tracking market index, and the return error is the tracking error. There are many factors can be effects on the tracking error, such as cash flows, trading costs, index changing, return distribution, investment strategy etc. Minimizing the tracking error is the ETF investment goal. Section II measures the tracking error of SSE 50 ETF by using three econometrical models. The result is the tracking error is well controlled in the investment goal, but the risk of tracking error became higher in the state share reform period. Section IV thinks the tracking error determines the capacity of index fund management. Constructing a closest portfolio to index and minimizing the tracking error are the most important issues for the managers of index funds.Chapter V introduces the arbitrage theory. Section I analyses the principle of ETF arbitrage. ETF can be purchased or redeemed with a basket of stocks, and also be traded in Securities Exchange, which provides the arbitrage trading opportunity. In theory, trading prices should equal to net asset value of ETF, but they are often unequal (discounting /premium) in reality by many factors. Section II analyses the arbitrage trading of SSE 50 ETF. Using discounting arbitrage trading, we explain the decreasing shares of the SSE 50 ETF in the state share reform period.Chapter VI summarizes key research findings and the need for further in-depth research on several issues.3. Innovation and shortcomings of dissertationThe main innovation performance is in the following areas:(1) There is a detail summary and comparative study about the efficient market hypothesis, which is the fundamental theory of the indexing investment. Investors can achieve an average return of stock market through the buy-and-hold strategy in the long-term period, and also share the interests of economic growth and earn return higher than that of majority positive investment funds. (2) Through empirical research on SSE 50 ETF, we measure its tracking error which is the key indicator whether ETF management satisfy its investment goal. Applying the arbitrage theory, we explain the decrease shares of SSE 50 ETF in the state share reform period.As a newly generated investment theory by only 30 years, the indexing investment is still at a stage of development, which has many issues worthy of further study. Restricting by academic aptitude and length of articles, the paper still has many shortcomings. I really hope teachers and students will give valuable advice to me, and will continue to study relevant theory in the future.