A Study On Institutional Investors' Practice Of Arbitrage And Its Affection For Investing Behavior Of Chinese Securities Investors

In the amidst of a diversified development of China's institutional investor, the influence which securities investment funds exerts on market is gradually weakened. Since the fourth quarter of 2008, institutional investor—major of whom are insurance companies and social security funds, conducted band operation amid the on-going stock market turbulence, but still succeeded repeatedly in "selling at the top" and "buying at the bottom". This phenomenon has been attracting more and more attentions.This thesis will first analyze the current structure of institutional investors of the securities investment funds, and then applying the Prospect Theory to analyze institutional investors'operating strategy both theoretically and empirically. The analysis results reveal that within the concept of pursuing relative gains, the strategy in which China's institutional investors operate their Equity Capital features distinct characteristic of "Disposition Effect". Owing to the operation pattern of open-ended fund and the liquidity risk it brings, institutional investors can affect the investment operation of open-ended fund through their purchase and redemption. Therefore, this thesis argues that institutional investors'band operation of Equity Capital (including stocks and securities investment funds) has actually formed a certain behavioral arbitrage to securities investment funds. Behavioral arbitrage is caused by investments of institutional investors, while institutional arbitrage is a result of institutional premium in stock market—kind of institutional dividend in essence. The essential difference between the two kinds of arbitrages determines that the behavioral one always exists in the market and its influence on market will remain in a long term.On the contrary, institutional arbitrage depends on a certain market system in a particular period, and thus its influence on the overall market and long-term impact are limited. So this thesis will focus on the behavioral arbitrage of institutional investors and its influence on the securities investment funds. In this thesis, the analysis of the behavioral arbitrage's influence on securities investment funds is based on the dynamic games of incomplete information between individual investors and securities investment funds; and after taking the factors of institutional investors'arbitrage into consideration; an in-depth discussion of the original game result will be presented. This concludes that institutional investors' behavioral arbitrage to the open-ended funds leads to a failure in operating the fund according to the principle of utility maximization, which at the same time increases the costs of fund and brings down the yield rate. Besides, part of the reasons for this arbitrage is the unbalanced supervision of administration. Therefore the purpose of this study is to offer some policy suggestions for management.