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Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts

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  • Swaminathan, Bhaskaran
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    Abstract

    This article describes the relation between closed-end fund discounts and time-varying expected excess returns on small firms. The results indicate that closed-end fund discounts forecast future excess returns on small firms. The information in discounts is independent of that in other commonly used forecasting variables such as the dividend yield on the market, the default spread, and the term spread. Furthermore, the closed-end fund discount forecasts only the small firm factor return and is the only variable that forecasts the small firm factor return. Additional tests indicate that the information in discounts is related to expectations of future earnings growth and expectations of future inflation. These results provide significant support for a rational explanation of the time-series relationship between discounts and expected returns on small firms. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 9 (1996)
    Issue (Month): 3 ()
    Pages: 845-87

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    Handle: RePEc:oup:rfinst:v:9:y:1996:i:3:p:845-87

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    Cited by:
    1. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, EconWPA.
    2. Guzman, Giselle C., 2008. "Using sentiment to predict GDP growth and stock returns," MPRA Paper 36505, University Library of Munich, Germany.
    3. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2013. "Investor sentiment effect in stock markets: Stock characteristics or country-specific factors?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 572-591.
    4. Warren Bailey & Lin Zheng & Yinggang Zhou, 2012. "What Makes the VIX Tick?," Working Papers 222012, Hong Kong Institute for Monetary Research.
    5. Schmeling, Maik, 2009. "Investor sentiment and stock returns: Some international evidence," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 394-408, June.
    6. 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, 08.
    7. Chan, Kalok & Kot, Hung Wan & Li, Desmond, 2008. "Portfolio concentration and closed-end fund discounts: Evidence from the China market," Emerging Markets Review, Elsevier, vol. 9(2), pages 129-143, June.
    8. Arquette, Gregory C. & Brown Jr., William O. & Burdekin, Richard C.K., 2008. "US ADR and Hong Kong H-share discounts of Shanghai-listed firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1916-1927, September.
    9. Katrin Tinn, 2010. "Technology Adoption with Exit in Imperfectly Informed Equity Markets," American Economic Review, American Economic Association, vol. 100(3), pages 925-57, June.
    10. 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.
    11. Guzman, Giselle C., 2008. "Using sentiment surveys to predict GDP growth and stock returns," MPRA Paper 36653, University Library of Munich, Germany.
    12. 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.
    13. Halkos, George, 2005. "Determining empirically behavioral and fundamental factors of discounts on closed end funds," MPRA Paper 49280, University Library of Munich, Germany.
    14. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    15. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
    16. Li, Yan & Ng, David T. & Swaminathan, Bhaskaran, 2013. "Predicting market returns using aggregate implied cost of capital," Journal of Financial Economics, Elsevier, vol. 110(2), pages 419-436.

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