An Empirical Research On The Window-Dressing Of Security Investment Funds

With the prevalence of the delegated investment, mutual funds become more and more important in the world securities market. In recent years, China stock market has witnessed a rapid and firm development of the security investment funds which have became one of the largest and most important investor and also theoretical research objects.It has been proved by many researches that security investment funds played positive role on the efficiency and stabilization of the stock market. However, with the development of market anomalies and behavior theory, the irrational investment behaviors of security funds have also been disclosed, which bring on the market non-effective. To examine the potential problems in China security investment funds, the paper studies the one of the major irrational investment behavior-"Window- Dressing"which results from the Principal-agent Problems under the delegated investment model. And then it offers empirical evidence to funds managers and regulators to advance the health development of China security investment funds.Using the methodology of the Calendar Effect, this paper is focused on the empirical examines on NAVs and funds'major stock holdings intending to disclosed the Window-Dressing behavior of security investment funds. The main body of this paper includes two parts. First, it examines on NAVs to find the Window-Dressing effect of security investment funds. Using the open-end stock funds data from 2001 to 2008, it introduces dummy variables in the fixed-effect regression model. Furthermore, it discusses the characters of the abnormal NAVs inflation widthwise and lengthwise. Second, the paper examines funds'major stock holdings to find the Window-Dressing effect of security investment funds. Using the stock funds data from 2003 to 2008, it tests the trading days at quarter-ends/quarter-beginnings and year-ends/year-beginning. Moreover, it discusses the characters of abnormal stock holdings inflation from the perspective of their importance and difficulty.The paper draws several conclusions. First, the NAVs for all open-end stock funds from 2001 to 2008 expressed abnormal positive excess returns on the quarter-ends and abnormal negative excess returns on the year-ends. As time goes on, Window-Dressing effect becomes more obvious. The main aim of the NAVs inflation in quarter-ends is to improve a good rank. Second, funds'major stock holdings from 2003 to 2008 expressed abnormal positive excess returns on the quarter-ends and abnormal negative excess returns on the year-ends. The stocks with higher rates on funds'stock holdings and higher turnovers are more abnormal excess returns, which are manifest in stock holdings by open-end funds. To explain the phenomenon of abnormal negative excess returns on year-ends in China security investment funds will be a very interesting issue that bears researching.At last the paper summarizes the characters of china's security investment funds'Window-Dressing behavior by interpreting and discussing the empirical results of the study. It also gives out some pieces of advice and further study.Based on the theory of Principal-agent Problems to explain the irrational behaviors of security investment funds, this paper studies and tests Window-Dressing effect systematically with the latest China security market data from a wide direction, which made this paper more significant for both academic and practical way.