An Economic Interpretation of ETF Evolution_ Suggestions for China ETF Innovation(2005年7月).pdfVIP

AN ECONOMIC INTERPRETATION OF ETF EVOLUTION : SUGGESTIONS FOR CHINA ETF INNOVATION 周 昆 K. Victor Chow1 Professor of Finance, West Virginia University Visiting Financial Economist, Shanghai Stock Exchange ABSTRACT Exchange Trade Funds (ETF) perhaps are one of the most significant and successful financial innovation in that past decades. This manuscript provides not only a brief survey of the ETF development but also the economic interpretation of ETF evolution. Specifically, demand for market basket from the theory of mutual fund separation is the fundamental driving force for index instruments. Arbitrage process toward market equilibrium explains the need for continuously tradable index tracking products. The arbitrage theory is also crucial for the explanation of ETF expansion. The paper demonstrates that the ETF expansion should consider the replication of risk-factor borne by investors: in addition to the market risk factor, there are four factors, value, momentum, contrarian, and liquidity. Importantly, this article conservatively makes few suggestions for the ETF innovation in China. From the viewpoint of fair-market equilibrium, this research paper recommends the allowance of conditional short-sale of ETF products. The money market ETF could be an important ETF innovation in China. It attracts non-speculative investors or savers and increases Stock Exchanges activities. The development of ETF derivatives is also necessary to eliminate unnecessary arbitrage opportunity and