IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v33y2017icp124-142.html
   My bibliography  Save this article

Short selling and the pricing of closed-end funds

Author

Listed:
  • Alexander, Gordon J.
  • Peterson, Mark A.

Abstract

We analyze how short selling affects the pricing of U.S. closed-end funds over the 2010–2015 time period. Significant short selling is found in both premium and discount funds and increases as premiums rise. Funds with greater short selling experience significant declines in premiums over the next five days. Our analysis speaks to theories of closed-end fund pricing and is consistent with the neoclassical theory of closed-end fund pricing as described by Ross (2002), Berk and Stanton (2007), and Cherkes, Sagi, and Stanton (2009).

Suggested Citation

  • Alexander, Gordon J. & Peterson, Mark A., 2017. "Short selling and the pricing of closed-end funds," Journal of Financial Markets, Elsevier, vol. 33(C), pages 124-142.
    • Handle: RePEc:eee:finmar:v:33:y:2017:i:c:p:124-142
    DOI: 10.1016/j.finmar.2016.08.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1386418115301191
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.finmar.2016.08.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
    2. Stephen E. Christophe & Michael G. Ferri & James J. Angel, 2009. "Short Selling and the Weekend Effect in Nasdaq Stock Returns," The Financial Review, Eastern Finance Association, vol. 44(1), pages 31-57, February.
    3. Richard W. Sias & Laura T. Starks & Seha M. Tiniç, 2001. "Is Noise Trader Risk Priced?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(3), pages 311-329, September.
    4. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    5. Day, Theodore E. & Li, George Z. & Xu, Yexiao, 2011. "Dividend distributions and closed-end fund discounts," Journal of Financial Economics, Elsevier, vol. 100(3), pages 579-593, June.
    6. Sias, Richard W, 1997. "Price Pressure and the Role of Institutional Investors in Closed-End Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 211-229, Summer.
    7. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306.
    8. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    9. Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302.
    10. Brauer, Greggory A., 1984. "`Open-ending' closed-end funds," Journal of Financial Economics, Elsevier, vol. 13(4), pages 491-507, December.
    11. 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.
    12. 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(1), pages 107-117, March.
    13. 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.
    14. Kumar, Raman & Noronha, Gregory M, 1992. "A Re-examination of the Relationship between Closed-End Fund Discounts and Expenses," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(2), pages 139-147, Summer.
    15. Martin Cherkes, 2012. "Closed-End Funds: A Survey," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 431-445, October.
    16. Martin Cherkes & Jacob Sagi & Richard Stanton, 2009. "A Liquidity-Based Theory of Closed-End Funds," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 257-297, January.
    17. Malkiel, Burton G, 1977. "The Valuation of Closed-End Investment-Company Shares," Journal of Finance, American Finance Association, vol. 32(3), pages 847-859, June.
    18. Richard W. Sias, 1997. "Price Pressure And The Role Of Institutional Investors In Closed-End Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 211-229, June.
    19. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    20. Gordon Gemmill & Dylan C. Thomas, 2002. "Noise Trading, Costly Arbitrage, and Asset Prices: Evidence from Closed‐end Funds," Journal of Finance, American Finance Association, vol. 57(6), pages 2571-2594, December.
    21. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    22. Jonathan B. Berk & Richard Stanton, 2007. "Managerial Ability, Compensation, and the Closed‐End Fund Discount," Journal of Finance, American Finance Association, vol. 62(2), pages 529-556, April.
    23. Jeffrey Pontiff, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1135-1151.
    24. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    25. Steven A. Ross, 2002. "Neoclassical Finance, Alternative Finance and the Closed End Fund Puzzle," European Financial Management, European Financial Management Association, vol. 8(2), pages 129-137, June.
    26. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    27. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    28. Sias, Richard W & Starks, Laura T & Tinic, Seha M, 2001. "Is Noise Trader Risk Priced?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(3), pages 311-329, Fall.
    29. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    30. Raman Kumar & Gregory M. Noronha, 1992. "A Re-Examination Of The Relationship Between Closed-End Fund Discounts And Expenses," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(2), pages 139-147, June.
    31. 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)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jie He & Kam C. Chan, 2023. "Does short sales deregulation affect qualitative information disclosure?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1351-1380, April.

    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. Jullavut Kittiakarasakun & Lalatendu Misra & Sinan Yildirim, 2018. "An analysis of closed-end funds discounts viewed from a lack of redemption perspective," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 415-440, February.
    2. Huang, Emily J., 2015. "The role of institutional investors and individual investors in financial markets: Evidence from closed-end funds," Review of Financial Economics, Elsevier, vol. 26(C), pages 1-11.
    3. Emily J. Huang, 2015. "The role of institutional investors and individual investors in financial markets: Evidence from closed‐end funds," Review of Financial Economics, John Wiley & Sons, vol. 26(1), pages 1-11, September.
    4. Bradley, Michael & Brav, Alon & Goldstein, Itay & Jiang, Wei, 2010. "Activist arbitrage: A study of open-ending attempts of closed-end funds," Journal of Financial Economics, Elsevier, vol. 95(1), pages 1-19, January.
    5. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    6. 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.
    7. Kräussl, Roman & Pollet, Joshua & Stefanova, Denitsa, 2018. "Signaling or marketing? The role of discount control mechanisms in closed-end funds," CFS Working Paper Series 597, Center for Financial Studies (CFS).
    8. Stylianos X. Koufadakis, 2016. "Mispricing Explanations of Closed-End Funds: A Survey Review," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(1-2), pages 108-135, January-J.
    9. Dilip Patro & Louis R. Piccotti & Yangru Wu, 2017. "Exploiting Closed-End Fund Discounts: A Systematic Examination Of Alphas," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(2), pages 223-248, June.
    10. Akbas, Ferhat & Boehmer, Ekkehart & Jiang, Chao & Koch, Paul D., 2022. "Overnight returns, daytime reversals, and future stock returns," Journal of Financial Economics, Elsevier, vol. 145(3), pages 850-875.
    11. 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.
    12. Kim, Doseong & Kim, Yura & Song, Kyojik Roy, 2013. "Payout policies on U.S. closed-end funds," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 345-356.
    13. Johnson, Shane A. & Lin, Ji-Chai & Roy Song, Kyojik, 2006. "Dividend policy, signaling, and discounts on closed-end funds," Journal of Financial Economics, Elsevier, vol. 81(3), pages 539-562, September.
    14. Andreou, Panayiotis C. & Kagkadis, Anastasios & Philip, Dennis & Tuneshev, Ruslan, 2018. "Differences in options investors’ expectations and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 315-336.
    15. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    16. David C. Ling & Andy Naranjo & Benjamin Scheick, 2014. "Investor Sentiment, Limits to Arbitrage and Private Market Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 531-577, September.
    17. Qian, Xiaolin, 2014. "Small investor sentiment, differences of opinion and stock overvaluation," Journal of Financial Markets, Elsevier, vol. 19(C), pages 219-246.
    18. Mohamed Ayadi & Hatem Ben-Ameur & Skander Lazrak & Yue Wang, 2013. "Canadian Investors and the Discount on Closed-End Funds," Journal of Financial Services Research, Springer;Western Finance Association, vol. 43(1), pages 69-98, February.
    19. Kräussl, Roman & Pollet, Joshua M. & Stefanova, Denitsa, 2023. "Closed-end funds and discount control mechanisms," CFS Working Paper Series 707, Center for Financial Studies (CFS).
    20. Alexander, Gordon J. & Peterson, Mark A. & Beardsley, Xiaoxin Wang, 2014. "The puzzling behavior of short sellers around earnings announcements," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 255-278.

    More about this item

    Keywords

    Closed-end funds; Short selling;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    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:eee:finmar:v:33:y:2017:i:c:p:124-142. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/finmar .

    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.