Fund flow effect on the behavior of the fund and the market return
|Keywords||Fund Flows Portfolio Investment Behavior Portfolio Adjustments Market Return Market Volatility|
Fund flow means the cash flow of funds during a particular time. For the open-end funds, the fund holders can purchase or redeem the fund share according to their demand. The inflow of funds occurs from the purchase of the share, and the outflow of funds occurs from the redemption of the share. Therefore, fund flows tend to reflect the fund investors’behavioral preferences, the investors’sentiment and other important factors.The theoretical studies found that the fund flow can result in the flow of cash capital, so it is one of the main reasons leading to the liquidity risk of open-end fund. It will also result in the dynamic adjustment of the fund’s investment portfolio. The impacts of the fund flow on the market include the stock trading behavior of fund managers, the asset allocation dynamic adjustment, and these two factors will also affect the market rate of return and volatility rates. Therefore, this paper mainly examines the impact of fund flow in open-end equity funds on the fund investors’ behavior and market performance.This paper examines two empirical models, respectively, to study the impact of the fund flow on the dynamic adjustment for the configuration of the fund assets (cash and stock), the action of the stock trading behavior, and the market rate of return and volatility. The empirical methods are Dynamic Panel Data Model and Vector-Autoregressive (VAR) model. The main conclusions are as follows:1. The investment behavior of China’s open-end equity funds is significantly affected by fund flows. The behavior of fund holders has knock-on effects on investment behavior of fund managers, and directly affects the strategic choice and portfolio adjustments of fund managers. In a bull market, the rate of fund inflows and the proportion of fund cash holdings has positive correlation; however, the correlation is negative in oscillation market.2. Fund flow directly result in the fund managers’ stock trading behavior: moreover, the fund’s investment style, leverage, and institutions holding proportion will also affect the sensitivity of the fund managers’ trading behavior on the fund flow. Index fund managers are more sensitive for the fund flow:the fund’s financing leverage passivate the impact of fund flow on the stock trading:when the fund has high proportion of institution investors, the fund managers tend to reduce the stock purchase from fund inflows to deal with possible massive redemption in future.3. There is significant relationship between open-end fund flows and market yields and volatility. The inflow of funds will lead to low market volatility in the future, while the outflow of funds will lead to higher market volatility in the future. At the same time, the fund investors time the fund investment based on market volatility, which means they tend to increase the fund investment when the market volatility is low. The aggregate flow of the funds will not cause a direction impact on the future market yields in the future, and fund investors tend to increase the fund investments in the market of the high rate of return.Finally, based on the empirical findings, this paper offers a few suggestions for the fund investment operations and liquidity risk control in the future.