What Moves the Discount on Country Equity Funds?
AbstractThe paper characterizes several empirical regularities of closed- end fund prices and examines the extent to which a 'sentiment' model of asset prices is consistent with the empirical regularities. We find that after controlling for the effect of cross-border investment restrictions, country funds trade at an average discount. Discounts vary substantially and contribute to a variance in country fund weekly returns which is generally three times greater than the returns on the net asset value (NAV). Regression analysis suggests that discounts have predictive power for fund returns but not for NAV returns, suggesting that investor 'sentiment' is a component of the price of a fund and not its NAV. Estimation of an unobserved components model on the discounts of the funds reveals a significant and strongly persistent common component across fund discounts. Regressions of fund and NAV returns on financial variables reveal that fund prices are 'sticky' with respect to movements in the host country's stock market and overly sensitive to variation in the U.S. and world stock markets. This relation is unaffected when we consider separately funds whose host countries restrict cross-border investment and funds which invest in emerging stock markets.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4571.
Date of creation: Dec 1993
Date of revision:
Publication status: published as The Internationalization of Equity Markets, Jeffrey A. Frankel ed., pp. 345-397, (Chicago: University of Chicago Press: 1994).
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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