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Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts

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  • Nazif Durmaz
  • Hyeongwoo Kim
  • Hyejin Lee
  • Yanfei Sun

Abstract

Closed-end fund (CEF) prices often exhibit large and persistent deviations from their associated net asset values (NAVs), which is puzzling since CEFs are repackaged financial assets and NAVs are publicly observable. We point out that such high persistence is mainly observed when linear models are employed, calling for nonlinear models to understand this so-called CEF discount puzzle. Applying the RALS-LM framework that allows for multiple endogenously identified trend-breaks for 31 CEF discount data, we show that CEF prices tend to fluctuate around time-varying time trends, which can be consistent with a regime switching model. We also demonstrate that utilizing non-normal errors through moment conditions enhances the efficiency at the margin. Nonlinearity with level shifts only fails to explain the observed persistence of CEF discounts.

Suggested Citation

  • Nazif Durmaz & Hyeongwoo Kim & Hyejin Lee & Yanfei Sun, 2023. "Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts," Auburn Economics Working Paper Series auwp2023-03, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2023-03
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    More about this item

    Keywords

    Closed-End Fund; CEF Discount Puzzle; Residual Augmented Least Squares; Non-Normal Error; Trend Breaks;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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