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Noise-trading, costly arbitrage, and asset prices: Evidence from US closed-end funds

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  • Flynn, Sean Masaki

Abstract

The behavior of US closed-end funds is very different from that of UK funds. There is no evidence that the US funds' discounts are constrained by arbitrage barriers, no evidence that higher expenses increase discounts and no evidence that replication risk increases discounts but strong evidence that noise-trader risk is priced. The differences between US and UK funds may be due to the fact that small investors dominate US funds while institutional investors dominate UK funds, or because the sample selection method for the UK funds chooses only funds that are relatively easy to arbitrage.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 15 (2012)
Issue (Month): 1 ()
Pages: 108-125

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Handle: RePEc:eee:finmar:v:15:y:2012:i:1:p:108-125

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Web page: http://www.elsevier.com/locate/finmar

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Keywords: Closed-end funds; Noise-trader risk; Arbitrage;

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References

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  1. Peavy, John W, III, 1990. "Returns on Initial Public Offerings of Closed-End Funds," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 695-708.
  2. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  3. 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.
  4. 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.
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  9. 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.
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  11. Boudreaux, Kenneth J, 1973. "Discounts and Premiums on Closed-End Mutual Funds: A Study in Valuation," Journal of Finance, American Finance Association, vol. 28(2), pages 515-22, May.
  12. Sean Masaki Flynn, 2010. "Short Selling And Mispricings When Fundamentals Are Known: Evidence From Nyse‐Traded Closed‐End Funds," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 33(4), pages 463-486, December.
  13. Brickley, James A. & Schallheim, James S., 1985. "Lifting the Lid on Closed-End Investment Companies: A Case of Abnormal Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(01), pages 107-117, March.
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Cited by:
  1. Davies, Richard & Fletcher, Mary & Marshall, Andrew, 2013. "Investigating the role of illiquidity in explaining the UK closed-end country fund discount," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 121-130.
  2. Flynn, Sean M., 2005. "Closed-end Fund Discounts and Interest Rates: Positive Covariance in US Data after 1985," Vassar College Department of Economics Working Paper Series 73, Vassar College Department of Economics.

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