Policy-Oriented Long-Term Funds, ETFs, and Market Volatility: Evidence from China

Abstract

Under the institutional background of promoting long-term funds to enter China's capital market, this paper studies the impact of policy-based long-term funds entering the market through transactional open index funds (ETFs) on stock market volatility and how it works. We used the daily data from 2022 to 2025, and adopted the fixed effect panel regression and event research method. The results show that the net inflow of ETF funds can significantly reduce the market fluctuation the next day, and this effect depends on the situation-it will play a greater role when the market funds are tight. Further analysis shows that the effect of stabilizing the market cannot be completely explained by the better liquidity at the transaction level, but more like a policy signal channel affecting everyone's expectations. This study provides empirical evidence for the conditional effect of policy long-term capital intervention in China's stock market.