Research On Liquidity Of Chinese Exchange Traded Funds

ETFs have become increasingly popular alternatives to conventional index mutual funds, introducing a new competing investment vehicle. Despite the importance ETFs have recently gained, little is known about their liquidity. The academic literature initially foucused on their performance and their impact on associated instreuments such as index constituentes, index derivatives and competing index mutual funds. Understanding the liquidity of ETFs is of prime importance to answer various questions raised by th e development of this market.Liquidity is one of core criterion for judging the quality of market. The ETF products in China have very different liquidity status. In order to promote the ETF market’s trading activity and attract more investors, enhancing the liquidity level of ETF products is especially important. At present, the study of ETF market is still in its infancy, lacking of strong support by the empirical model. Combined with the research of foreign markets, this dissertation analyzes the factor s influencing the liquidity of these 60 ETFs by using panel regression model, and also analyzes the dynamic relationship between the liquidity of ETF and its target index by using Panel-VAR model and impulse response functions.The research found that the factors affecting ETF liquidity include the characteristics of the product itself, the index features and characteristics of investors. Conclusions are as follows: ETF products which have larger fund size, higher net growth rate and with more competitors get a better liquidity. As for the target index which are larger and more stable can help to enhance the liquidity of the ETFs. Furthermore, a lower proportion held by institutional investors leads to better liquidity of the ETFs. This indicate a fundamenta l relationship among ETFs, underlying index and Fund Company’s capability. At the same time, this dissertation discusses the investment style of institutional investors in China. Our institutional investors are still short-term speculation based, so that the ETFs have lower liquidity which institutions investors hold greater share. Based on this, this dissertation applies PVAR model to analyze the linkage relationship between ETF and the underlying index. The result shows that ETFs’ liquidity is strongly affected by the underlying index in the short term, but both of them subject only to its own liquidity in the long run. This helps a lot to control the market liquidity risk between ETF and underlying index. The dissertation concludes with some suggestions for the growth of China’s ETF market.