The Dynamics Between Stock Returns And Mutual Fund Flows Of China

After more than ten years of rapid development,China’s open-end fund has become the largest institutional investors in the stock market,along with the continuous expansion of scale and the constant improvement of the type,the linkages of China’s open-end funds and stock market has gradually attracted a lot of attention.Using a data set of four different kinds of the open-end fund for the period January2006to December2012,we made a comprehensive empirical study on the interaction between China’s open-end fund flows and the stock market returns.In this paper we focused on the interaction between the stock market returns and the fund flows of different types of open-end funds and the effect of the fund flows to the volatility of the stock market.Empirical research is mainly use the cointegration test, the VAR model,impulse response function,Granger causality test and GARCH models.The results shows that a positive relationship exists between stock market returns and equity fund flows and the investors of equity funds and hybrid funds are feedback traders. We also found that a positive correlation between the equity fund flow of last period and the current stock market returns which indicates that the price pressure effect of equity fund flows.Bond funds and money market funds flows can not be explained by the early stock market returns, bond funds and money market funds is relatively independent from the stock market,which can stabilize the volatility of the market at some level.Concerning the volatility of the stock market,we found that in a period of the rapid expansion of China’s open-end fund,China’s stock market volatility was significantly higher than the stable period of fund flows.Lastly,based on the empirical outputs,we puts forward several policies and suggestions.