Abstract
There are two types of exchange-traded funds in China: ETF itself and listed open-ended funds(LOF). LOF is similar to ETF in that it can be traded on the stock exchange but differs in that it can be actively managed along with index-tracking. This study investigates the price efficiency of ETFs and LOFs that track China’s CSI300 index from January 2012 to June 2020. The empirical results are as follows. First, price deviation from net asset value(NAV) of LOFs is larger than that of ETFs, whereas liquidity of LOFs is lower than that of ETFs. Second, the daily price deviations show autocorrelation in both ETFs and LOFs, suggesting that arbitrage opportunities exist in a short period of time. Third, the illiquidity of ETFs and LOFs is positively associated with the price deviation after controlling for the autocorrelation of the deviation, fund size, price volatility, and momentum. For the robustness check, I apply the two-step Generalized Moment of Method(GMM), and the results are not changed. Overall, this study suggests that liquidity is an important determinant of price efficiency in ETFs and LOFs and that the lack of price efficiency may hinder the growth of LOF market in China.
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