IDEAS home Printed from https://ideas.repec.org/p/ysm/wpaper/ysm80.html
   My bibliography  Save this paper

Closed-End Fund Discounts in a Rational Agent Economy

Author

Listed:
  • Matthew Spiegel

Abstract

Nearly any standard financial model concludes that two assets with identical cash flows must sell for the same price. Alas, closed-end mutual fund company share prices seem to violate this fundamental tenant. Even when one considers several standard frictions, such as taxes and agency costs, classical financial models cannot explain the large persistent discounts found within the data. While the standard financial markets model may not explain the existence of large closed-end fund discounts, this paper shows that a rather close version of it does. In an otherwise frictionless market, if asset supplies vary randomly over time and agents posses finite lives a closed-end mutual fund's stock price may not track its net asset value. Furthermore, the analysis provides a number of conditions under which these discrepancies will lead to the existence of systematic discounts for the mutual fund's shares. In addition, the model provides predictions regarding the correlation between current closed-end fund discounts and current changes in stock prices and future changes in corporate productivity. As the analysis shows the same parameter values that lead to systematic discounts

Suggested Citation

  • Matthew Spiegel, 1998. "Closed-End Fund Discounts in a Rational Agent Economy," Yale School of Management Working Papers ysm80, Yale School of Management, revised 01 Aug 2000.
    • Handle: RePEc:ysm:wpaper:ysm80
    as

    Download full text from publisher

    File URL: https://repec.som.yale.edu/icfpub/publications/2622.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-1484, September.
    2. Swaminathan, Bhaskaran, 1996. "Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts," The Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 845-887.
    3. Chopra, Navin, et al, 1993. "Yes, Discounts on Closed-End Funds Are a Sentiment Index," Journal of Finance, American Finance Association, vol. 48(2), pages 801-808, June.
    4. Chen, Nai-fu & Kan, Raymond & Miller, Merton H, 1993. "Are the Discounts on Closed-End Funds a Sentiment Index?," Journal of Finance, American Finance Association, vol. 48(2), pages 795-800, June.
    5. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. "Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
    6. Handley, Kathleen Weiss & Lee, Charles M. C. & Seguin, Paul L., 1996. "The Marketing of Closed-end Fund IPOs: Evidence from Transactions Data," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 127-159, April.
    7. Bhushan, Ravi & Brown, David P. & Mello, Antonio S., 1997. "Do Noise Traders “Create Their Own Space?”," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(1), pages 25-45, March.
    8. Matthew I. Spiegel, 1997. "Stock Price Volatility in a Multiple Security Overlapping," Yale School of Management Working Papers ysm32, Yale School of Management.
    9. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    10. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    11. Chen, Nai-fu & Kan, Raymond & Miller, Merton H, 1993. "Are the Discounts on Closed-End Funds a Sentiment Index? A Rejoinder," Journal of Finance, American Finance Association, vol. 48(2), pages 809-810, June.
    12. Thompson, Rex, 1978. "The information content of discounts and premiums on closed-end fund shares," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 151-186.
    13. Chopra, Navin, et al,, 1993. "Yes, Discounts on Closed-End Funds Are a Sentiment Index: Summing Up," Journal of Finance, American Finance Association, vol. 48(2), pages 811-812, June.
    14. Pontiff, Jeffrey, 1995. "Closed-end fund premia and returns Implications for financial market equilibrium," Journal of Financial Economics, Elsevier, vol. 37(3), pages 341-370, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, University Library of Munich, Germany.
    2. Matthew Spiegel, 1998. "Closed-End Fund Discounts in a Rational Agent Economy," Yale School of Management Working Papers ysm80, Yale School of Management, revised 01 Aug 2000.
    3. Philipp Kellerhals, B. & Schobel, Rainer, 2002. "The dynamic behavior of closed-end funds and its implication for pricing, forecasting, and trading," Journal of Banking & Finance, Elsevier, vol. 26(8), pages 1615-1643, August.
    4. Severn, Alan K., 1998. "Closed-end funds and sentiment risk," Review of Financial Economics, Elsevier, vol. 7(1), pages 103-119.
    5. Lenkey, Stephen L., 2015. "The closed-end fund puzzle: Management fees and private information," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 112-129.
    6. Durmaz, Nazif & Kim, Hyeongwoo & Lee, Hyejin & Sun, Yanfei, 2023. "Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts," MPRA Paper 117789, University Library of Munich, Germany.
    7. Flynn, Sean Masaki, 2012. "Noise-trading, costly arbitrage, and asset prices: Evidence from US closed-end funds," Journal of Financial Markets, Elsevier, vol. 15(1), pages 108-125.
    8. Gric, Zuzana & Bajzík, Josef & Badura, Ondřej, 2023. "Does sentiment affect stock returns? A meta-analysis across survey-based measures," International Review of Financial Analysis, Elsevier, vol. 89(C).
    9. Deven Bathia & Don Bredin, 2013. "An examination of investor sentiment effect on G7 stock market returns," The European Journal of Finance, Taylor & Francis Journals, vol. 19(9), pages 909-937, October.
    10. Alan K. Severn, 1998. "Closed‐end funds and sentiment risk," Review of Financial Economics, John Wiley & Sons, vol. 7(1), pages 103-119.
    11. Timothy R. Burch & Douglas R. Emery & Michael E. Fuerst, 2003. "What Can “Nine‐Eleven” Tell Us about Closed‐end Fund Discounts and Investor Sentiment?," The Financial Review, Eastern Finance Association, vol. 38(4), pages 515-529, November.
    12. Korkie, Bob & Nakamura, Mansao & Turtle, Harry J., 2001. "A contingent claim analysis of closed-end fund premia," International Review of Financial Analysis, Elsevier, vol. 10(4), pages 365-394.
    13. Froot, Kenneth A. & Dabora, Emil M., 1999. "How are stock prices affected by the location of trade?," Journal of Financial Economics, Elsevier, vol. 53(2), pages 189-216, August.
    14. Lee, Bong-Soo & Hong, Gwangheon, 2002. "On the dual characteristics of closed-end country funds," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 589-618, October.
    15. Dominic Gasbarro & Richard D. Johnson & J. Kenton Zumwalt, 2003. "Evidence on the Mean‐Reverting Tendencies of Closed‐End Fund Discounts," The Financial Review, Eastern Finance Association, vol. 38(2), pages 273-291, May.
    16. Nazif Durmaz & Hyeongwoo Kim & Hyejin Lee & Yanfei Sun, 2023. "Trend Breaks and the Persistence of Closed-End Fund Discounts," Auburn Economics Working Paper Series auwp2023-08, Department of Economics, Auburn University.
    17. Kim, Youngsoo & Lee, Bong Soo, 2007. "Limited participation and the closed-end fund discount," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 381-399, February.
    18. Carey Caginalp, 2018. "A Dynamical Systems Approach to Cryptocurrency Stability," Papers 1805.03143, arXiv.org.
    19. Rilwan Sakariyahu & Mohamed Sherif & Audrey Paterson & Eleni Chatzivgeri, 2021. "Sentiment‐Apt investors and UK sector returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3321-3351, July.
    20. Robert Chirinko & Hisham Foad, 2006. "Noise vs. News in Equity Returns," CESifo Working Paper Series 1812, CESifo.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ysm:wpaper:ysm80. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/smyalus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.