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Excess Volatility and Closed-End Funds

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  • Pontiff, Jeffrey

Abstract

If investors are rational, the variance of closed-end mutual fund returns should equal the variance of the underlying securities in their portfolios. In fact, this paper shows that the average closed-end fund's monthly return is 64 percent more volatile than its assets. Unlike variance-bounds tests, this facilitates an excess volatility test that does not rely on strong assumptions about discount rates or dividend streams. Although largely idiosyncratic, 15 percent of the average fund's excess risk is explained by market risk, small-firm risk, and risk that affects other closed-end funds. Copyright 1997 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 87 (1997)
Issue (Month): 1 (March)
Pages: 155-69

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Handle: RePEc:aea:aecrev:v:87:y:1997:i:1:p:155-69

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Cited by:
  1. Flynn, Sean M., 2005. "Sentiment and the Interpretation of News about Fundamentals," Vassar College Department of Economics Working Paper Series 72, Vassar College Department of Economics.
  2. Ana-Maria Fuertes & Dylan Thomas, 2004. "Market-wide shocks and anomalous price behaviour: evidence from closed-end funds," Money Macro and Finance (MMF) Research Group Conference 2004 56, Money Macro and Finance Research Group.
  3. Michael Bleaney & R. Todd Smith, . "Closed-End Fund Betas," Discussion Papers 06/04, University of Nottingham, School of Economics.
  4. Flynn, Sean M., 2005. "Noise-trading, Costly Arbitrage, and Asset Prices: Evidence from US Closed-end Funds," Vassar College Department of Economics Working Paper Series 71, Vassar College Department of Economics.
  5. Flynn, Sean Masaki, 2004. "Arbitrage in Closed-end Funds: New Evidence," Vassar College Department of Economics Working Paper Series 57, Vassar College Department of Economics.
  6. Jonathan Berk & Richard Stanton, 2004. "A Rational Model of the Closed-End Fund Discount," NBER Working Papers 10412, National Bureau of Economic Research, Inc.
  7. Terrance Odean., 1996. "Volume, Volatility, Price and Profit When All Trader Are Above Average," Research Program in Finance Working Papers RPF-266, University of California at Berkeley.
  8. Terrance Odean, 1998. "Volume, Volatility, Price and Profit When All Traders Are Above Average," Finance 9803001, EconWPA.
  9. Michael Bleaney & R. Todd Smith, . "Risk, Managerial Skill and Closed-End Fund Discounts," Discussion Papers 08/10, University of Nottingham, School of Economics.
  10. Michael Bleaney & R. Todd Smith, . "Excess Volatility and Closed-End Fund Discounts," Discussion Papers 11/05, University of Nottingham, School of Economics.
  11. Gunduz Caginalp & David Porter & Li Hao, 2011. "Asset Market Reactions to News: An Experimental Study," Working Papers 11-15, Chapman University, Economic Science Institute.
  12. Garrett H. TeSelle, 1998. "Bubbles or noise? Reconciling the results of broad-dividend variance-bounds tests," Finance and Economics Discussion Series 1998-42, Board of Governors of the Federal Reserve System (U.S.).

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