The Anomaly Of Open-end Funds' Redemption: Explanation Based On Behavior Finance

Open-end fund is becoming increasingly important as a security investment tool in today's financial market. The redemption mechanism is originally designed to stimulate the fund managers to work harder, thus earning more profits. If everything goes on well, investors will be more confident in the fund managers. However, in China, an interesting phenomenon occurs. That is, the better a fund performs, the more redemption investors make. Overseas it is called the Disposal Effect. If massive redemption occurs, the fund managers have to sell a large amount of stocks, which will lead to the net loss of the fund that directly detriments the investors' interest. A lasting and large quantity of redemption will severely impede China's open-end fund development. And it's also harmful for China's stock market. Based on the above concerns, this thesis tries to study this extraordinary phenomenon and the causes behind it, along with a few propositions.This thesis discusses redemption from the angle of the discontinuity of China's stock market performance, together with the theories from behavioral finance. On the one hand the author thought the discontinuity of China' fund performance will influence investors' emotion, which makes the behavioral cause of redemption. On the other hand other factors such as fund dividend, scale of the fund, listing time of the fund and fees can all influence the behavior of the investors, so the author adopted both qualitative and quantitive methods to analyze their impact on redemption.The data in this study range from the second season of 2004 to the second season of 2007. During this period China's stock market experienced a transition from a bear market to a bull market. The change of investors' emotion is very useful for our empirical study, which will adopt theories from behavioral finance.After our empirical study of redemption of open-end funds, our findings are as follows:Firstly, the discontinuity of China's stock market has lead to the redemption of the fund in China, despite the outlook of the market is promising. Other factors can also influence the emotion of the investors, such as dividend, scale and the age of funds, causing the "irrational" behavior. Secondly, we use the close-end fund's discount rate as a measurement of investors' emotion, which proves to be very effective. We use investors' confidence index and entrepreneurs' confidence index to measure the individual and institutional investors' confidence, which also proves to be effective.