Open-ended Fund Liquidity Risk Research

Open-end funds, a new vehicle in security market of China, combines the liquidity & convenience of current account and the high return of portfolio, which cause investors' general concern since they have been issued in September 2001.Open-end funds liquidity risk refers to the uncertainty that fund managers can redeem the portfolio at stable price in a given period when a large-scale withdrawal occurs, the extremes of which is quite similar to a run on the bank. Although it is booming in our security market, while in investor's passion, so many investors earned a lot from Open-end funds and securities. But, allowing for the developing security market and the inexperienced investors in China, we should be prepared for danger in times of safety, if it is down in the security market, it's hard to avoid large-scale withdrawal. Fund managers have to weigh profitability of fund asset against liquidity involved, so as to reduce the loss of net fund value and to drop the possibility of liquidity risk due to investors' withdrawal. These are the keys to the study of open-end fund liquidity risk.The article combines the particularity of China security market, analyzes the particularity and produce principle of the open-end funds liquidity risk, as while as other aspects which are likely to make liquidity risk. In demonstration, it includes 20 quarterly timing data of all the open-end funds from the third quarter in 2002 to the twice quarter in 2007. To prove the Granger cause by Eviews, make the model between the open-end funds capital flow and the security market by 8 variables vector autoregression model. In the part of capital supply management about open-end funds withdrawal behavior, to establish the holistic model about capital management, discuss the feasible measures when the fund managers face to funds withdrawal. In the part of policy and advice, to try to put some constructive advice to reduce open-end funds liquidity risk. We can draw these conclusions through the analysis in the article: (1)The conflict between profitability and liquidity is the root of open-end funds liquidity risk. (2) Open-end funds' performance depends on stock market, so the continuous and stable development of security market is the precondition of open-end fund. (3) Now, the individual holding proportion of the open-end funds is escalating; the serious homology phenomenon about the security structure is more and more serious, these are the hidden trouble which would bring up the liquidity risk. (4) So far, our security market has simplex investment variety, as well as the derivatives of short sales and risk-hedging is still in progress, which restrict fund managers' competence to control risk and increase their stress in dealing with liquidity risk.