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The Fundamental Theorems Of Asset Pricing And The Closed-End Fund Puzzle

Author

Listed:
  • GABRIEL FRAHM

    (Department of Mathematics and Statistics, Helmut Schmidt University, Holstenhofweg 85, D-22043 Hamburg, Germany)

  • ALEXANDER JONEN

    (Department of Mathematics and Statistics, Helmut Schmidt University, Holstenhofweg 85, D-22043 Hamburg, Germany)

  • RAINER SCHÜSSLER

    (#x2020;Department of Economics, University of Rostock, Ulmenstraße 69, D-18057 Rostock, Germany)

Abstract

We propose a solution to the closed-end fund puzzle in financial markets without a free lunch with vanishing risk. Our results are consistent with both the time-series and the cross-sectional aspect of the closed-end fund puzzle. It turns out that a closed-end fund cannot exist if the fund manager is supposed to receive a fee although he is not able to find mispriced assets in the market. By contrast, a premium can typically be observed at the initial public offering because the fund manager has access to information that enables him to create a dominant strategy. As soon as this weak arbitrage opportunity evaporates, a premium can no longer occur. The reason why a premium quickly turns into a discount might be that the fund manager stops applying a superior trading strategy at some point in time. Another possibility is that abnormal profits are transient in a competitive financial market. In any case, when the fund manager is no longer willing or able to maintain a superior strategy, the fund must trade at a discount in order to compensate for his management fee.

Suggested Citation

  • Gabriel Frahm & Alexander Jonen & Rainer Schüssler, 2019. "The Fundamental Theorems Of Asset Pricing And The Closed-End Fund Puzzle," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(05), pages 1-31, August.
    • Handle: RePEc:wsi:ijtafx:v:22:y:2019:i:05:n:s0219024919500250
    DOI: 10.1142/S0219024919500250
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    References listed on IDEAS

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