Investor Irrationality and the Role of Distribution Channels in Chinese Index Fund Selection

30 Pages Posted: 22 Jan 2019

See all articles by Jiaqi Huang

Jiaqi Huang

University of Queensland - Business School

Wang Chun Wei

University of Queensland - Faculty of Business, Economics and Law; University of Queensland - Finance

Min Zhu

University of Queensland

Date Written: January 21, 2019

Abstract

We examine the impact of distribution channels on fund selection in China. We show that fund selection in plain vanilla passive investment products in the Chinese context is complicated through strategic interactions between fund companies and their distribution channels. We find, contrary to common assumption, Chinese index funds are not homogeneous in structure and performance. There is significant tracking error and performance dispersion between products of seeming identical objectives. Our results show that, Chinese retail investors, facing high search costs, make suboptimal investment decisions and rely heavily on distribution channels for selecting funds. We also uncover strong opportunistic market timing characteristics amongst retail investors of index funds, which is not present with institutional investors. In aggregate, we document significant inefficiency in Chinese mutual fund market and social welfare loss associated with high search cost.

Keywords: Chinese mutual fund market, index funds, search cost, investor behaviour, distribution channels

JEL Classification: G14, G15, G23

Suggested Citation

Huang, Jiaqi and Wei, Wang Chun and Zhu, Min, Investor Irrationality and the Role of Distribution Channels in Chinese Index Fund Selection (January 21, 2019). 2019 Financial Markets & Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=3320105

Jiaqi Huang

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Wang Chun Wei (Contact Author)

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

University of Queensland - Finance ( email )

Australia

Min Zhu

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/min-zhu

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3
Abstract Views
28
PlumX Metrics