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Is differential sentiment a cause of closed-end country fund premia? An empirical examination of the Australian case

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  • Marc Simpson
  • Sanjay Ramchander

Abstract

One of the most puzzling empirical irregularities in finance is the persistence of discounts and premia on the net asset values (NAV) of closed-end country funds. Unlike previous papers, the present study adopts a novel approach to directly test the hypothesis that such premia are a reflection of differences in foreign and domestic investors' sentiments. The study employs Australian and US consumer survey data to illustrate how divergent consumer sentiments are useful in explaining the time varying pattern of discounts and premia on the First Australian Fund. While controlling for foreign and domestic market returns, as well as exchange rate changes, it is found that the more optimistic US consumers are over Australian consumers, the greater the premium on the fund, and vice versa.

Suggested Citation

  • Marc Simpson & Sanjay Ramchander, 2002. "Is differential sentiment a cause of closed-end country fund premia? An empirical examination of the Australian case," Applied Economics Letters, Taylor & Francis Journals, vol. 9(9), pages 615-619.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:9:p:615-619
    DOI: 10.1080/13504850110112567
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    References listed on IDEAS

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    1. Adrian W. Throop, 1991. "Consumer sentiment and the economic downturn," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar1.
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    7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, July.
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    9. Rich, Robert W, 1989. "Testing the Rationality of Inflation Forecasts from Survey Data: Another Look at the SRC Expected Price Change Data," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 682-686, November.
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    Cited by:

    1. Iuliana Ismailescu & Ben Branch, 2010. "Managerial Performance and Closed‐End Country Fund Premiums: A Lead or Lag Relationship?," International Review of Finance, International Review of Finance Ltd., vol. 10(4), pages 433-453, December.
    2. Jing Shi & Marcel Ausloos & Tingting Zhu, 2022. "If global or local investor sentiments are prone to developing an impact on stock returns, is there an industry effect?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1309-1320, January.
    3. George Emm Halkos & Theodore Krintas, 2006. "Behavioural and fundamental explanations of discounts on closed end funds: an empirical analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 16(5), pages 395-404.
    4. Ben Branch & Aixin Ma & Jill Sawyer, 2010. "Around‐the‐Clock Performance of Closed‐End Funds," Financial Management, Financial Management Association International, vol. 39(3), pages 1177-1196, September.
    5. Grossmann, Axel & Ozuna, Teofilo & Simpson, Marc W., 2007. "ADR mispricing: Do costly arbitrage and consumer sentiment explain the price deviation?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(4), pages 361-371, October.

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