Empirical Analysis On The Influence Of Stocks Open-end Fund’s Idiosyncratic Risk On Excess Return In China

The classical asset pricing theory assumes that investors can hold portfolios to diversify idiosyncratic risk, so only systematic risk should be priced while idiosyncratic risk should not be priced into the returns of assets. However, stock market is not completely efficient so investors can hardly hold sufficiently diversified portfolios because of incomplete information, insufficient amount of money and lack of investing knowledge and experience. In addition, more and more studies show that there is a’risk-income paradox’ in stock market:stocks with higher risk create lower returns while stocks with lower risk create higher returns. This is an opposition to the traditional CAPM theory. For the idiosyncratic risk, many studies focus on the stock market, while for the returns of mutual fund, studies focus on fund performance evaluation, fund performance persistence and factors which have influence on fund returns. However, the studies on the relationship between mutual fund’s idiosyncratic risk and the fund’s excess return are insufficient. Therefore, it is extremely urgent to study the influence of stocks open-end fund’s idiosyncratic risk on fund’s excess return, and whether it is consistent with the traditional capital asset pricing theory.In the paper,monthly data of stocks open-end funds for January1,2003to December31,2012is chosen as research sample, using CAPM model and Fama-French three-factor model respectively to estimate idiosyncratic risk, using portfolio analysis and Fama-Macbeth cross-sectional regression analysis to study the effects of fund idiosyncratic risk on the fund’s excess returns. We find that there is a significant negative correlation between idiosyncratic risk and the excess return of stocks open-end funds. Moreover, excess return of fund is positively correlated to fund’s size, negatively correlated to fund’s fee and generally positively correlated to fund’s age.