Study Of The Volatility Anomaly Of Mutual Funds

The relationship between the risks and return of financial instruments is an important academic research field of Finance.The classic EMH theory point out that the capital market is efficient and all unique risks can be dispersed.They considered only the remaining systematic risk should be compensated by risk premium.But many scholars found that the market is not efficient,there exist some securities anomalies such as volatility anomaly.In those anomalies idiosyncratic volatility is particularly prominent.Investors cannot diversify idiosyncratic risks because of lacking of sufficient information and fund.In stock market sometimes the high idiosyncratic volatility is accompany with low return rate.Does the idiosyncratic volatility need risk premium and it' s relation with the return rate deserve to be researched.This article used daily data and seasonal data of mutual funds market from January 1,2010 to December 21,2015 as the research sample.Fama-French three factors model and GARCH(1,1)model are used to decompose and predict the idiosyncratic volatility.Investment portfolio method,Fama-Macbeth cross-sectional regression and panel regression method are applied to study the relation between idiosyncratic volatility and the return rate of mutual funds.The results suggest that the idiosyncratic volatility whether is decomposed by FF three factors model or predicted by GARCH model is negatively correlated with return rate,which is significant when variables of former return rate,management fee ratio,funds size are controlled.After cut the full sample into two parts we can find that the idiosyncratic volatility anomaly becomes more significant when the market is upward while it is just the opposite when the market behaves not well.The bounded rationality may cause the idiosyncratic volatility anomaly.The factor impels fund managers to adjust the portfolios is mainly the redemption pressure from investors.Fund managers incline to increase the risks of portfolio to raise the profit of funds and relief the redemption pressure.