Based On Risk Assessment And Management Of Var Open-end Fund Liquidity

Open-end mutual funds have been the mainstream form of the global investment mutual fund industry and the developing direction in the future of the mutual funds industry in China.The liquidity risk of open-end mutual fund means the risk caused by infeasibility that the liquidity capital of open-end fund cannot fulfill the investor's redemptive need. The reason of the liquidity risk for the open-end mutual funds is the contradiction between the profit chasing and the liquidity chasing for the open-end mutual fund. There are two asymmetries between its purchase and redemption of the open-end mutual fund. One is the structure asymmetry caused by the high fluid capital sources and low fluid capital structures, the other is the asymmetry caused by the high systemic risk and the absence of the risk-avoiding mechanism. Therefore how to measure and management liquidity risk becomes the main problem for the mutual fund investment companies.Liquidity is the lifeblood of the financial markets. Its adequate provision is critical for the smooth operation of an economy. Its sudden erosion in even a single market segment or in an individual instrument can stimulate disruptions that transmitted through increasingly interdependent and interconnected financial markets worldwide. We usually use depth, tightness, resiliency and immediacy to describe the market liquidity, which includes the exogenous illiquidity and endogenous illiquidity. Exogenous illiquidity is the result of market characteristics;it is common to all market players and unaffected by the actions of any on participant. The market for liquid securities is typically characterized by heavy trading volumes, stable and small bid-ask spreads, stable and high levels of quote depth. Liquidity costs may be negligible for such positions when marking to market provides a proper liquidation value. Endogenous illiquidity, in contrast, is specific to one's poison in the market, varies across market participants, and the exposure of any one participant is affected by her actions. It is mainly driven by the size of the position: the larger the size, the greater the endogenous illiquidity.The Chinese financial market adopts the quote-driven trading mechanism, which is different with the order-driven trading mechanism. Theoretically, bid-ask spread only is used in the auction market, but in the quote-driven market there is no the bid-ask spread. Therefore, we has to use the spread between the lowest ask price and the highest bid price which are not be executed. This paper use the modified bid-ask spread to calculate the liquidity risk, which has always been neglected by the investment institutions. In the end, this paper gives some advices on the management of the liquidity risk of Open-end Mutual Funds in China.