An Empirical Study On The Arbitrage Stratege Of China’s Grading Funds

As one of the China’s capital market innovation, grading fund has been existing over for eight years. However, its operation mechanism is still not been known by a large number of investors. During the stock market crash happened several times this year, a lot of high premium grading fund B, which is faced with the risk of under the fold, was still been bought by a large number of investors and those investor suffered heavy losses. Lack of knowledge and imperfect exchange system design have been great reason. Therefore, to strengthen the investor education and improve exchange system is an imminent task. At the same time, the grading fund both meet the demands of investors who pursue high return and high risk and those who are risk averse. Therefore these grading funds are been increasingly active trading in recent years. In China’s capital market, grading fund A is exchanged at discount, grading fund B is exchanged at premium, and the grading fund is exchanged at premium in a long-term time, it can be said that in the China’s A-share capital market, the grading fund has natural arbitrage attributes especially in last year when the stock market is obviously abnormal fluctuating. This phenomenon is closely related to the T+1 and price limit system. In this paper, we put forward a practical and feasible grading fund arbitrage strategy which is based on the grading fund characteristics of the A stock market, and carries out a practical analysis.First, this paper gives a simple review about grading fund at home and abroad, expounds the origin of the grading fund, the present situation of grading fund in China, the species and the likely future trend of grading fund. Then giving the analysis about grading fund A share and B share mergering and splitting mechanism as well as conversion mechanism from the structure of grading fund and then giving the analysis of the A and B share discount or premium causes as well as the A and B share pricing mechanism from the aspect of folding premium rates. Finally, according to grading fund’s operation mode, gives the boundary judgment standard of discount and premium rate boundary in arbitrage opportunity process, the specific determining method for hedge ratio, the specific selection criteria in selecting a grading fund to do an arbitrage, and the arbitrage process detail. Combined with the grading fund market in 2014 and 2015, we give out the arbitrage test results of grading funds in different discount and premium rate to prove the feasibility of China’s grading fund arbitrage.Compared with some existing articles on the grading fund arbitrage, this paper not only has discount and premium arbitrage theoretical analysis, but also gives the actual historical test using a large number of secondary market transaction data, and considers the actual transactions inevitably impact on costs besides the fixed costs to achieve as much as possible including all market factors.