Empirical Research On Liquidity Risk Of Open-end Funds In China

In China, open-end funds are growing rapidly recent years. To March 2008, its number increased to 341. Liquidity risk is the main risk of an open-end fund. In China, our security market is on developing, so how to manage liquidity risk of open-end funds is a subject needs attention.This essay first provided a summarization of the existing research productions about liquidity risk. Then it explained what is liquidity risk and how liquidity risk comes into being. Generally speaking, liquidity risk is a procedure like this: first redemptions of fund give birth to cash liquidity risk; then the fund has to sell portfolios on the market to get enough cash; but doing this will low the fund's income, which effect the redemption of the investors, if investors lose their confidence about the fund, without doubt they would take their money back, and liquidity risk of the fund increases. In China, we have a developing security market. Our open-end funds' liquidity risk is outstanding.After introducing the theories about liquidity risk, the author picked up 20 open-end funds for empirical research. To calculate liquidity risk, VAR method was used. The results were adjusted by using GARCH model, then we got the conclusion. Liquidity risks of the sample open-end funds haven't showed distinct differences. After deleting some securities which have bigger liquidity risk, the funds' liquidity risk match their investing style mostly. At last, we did compare of liquidity, increasing rate of net value and net redemption rate. We come to the conclusion: liquidity risk of open-end funds in China mostly decided by the systematic risk of China's security market.