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Investor Reaction to Salient News in Closed-End Country Funds

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Author Info
Peter Klibanoff
Owen Lamont
Thierry A. Wizman
Abstract

We provide a model of closed-end fund pricing which includes investors who do not form expectations correctly and allows for salient country-specific news to affect this expectation formation process. We use panel data on prices and net asset values of closed- end country funds to examine investor reaction to news that affects fundamentals, and measure the response of the idiosyncratic change in fund prices to the idiosyncratic change in fund asset values. In a typical week, US prices underreact to changes in foreign fundamentals; the (short-run) elasticity of price with respect to asset value is significantly less than one. In weeks with major news (relevant to the specific country) appearing on the front page of The New York Times, prices react much more to fundamentals; the elasticity of price with respect to asset value is closer to one. These results are roughly consistent with the hypothesis that major news events lead some investors who normally lag behind in updating their expectations to temporarily react more quickly.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5588.

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Date of creation: May 1996
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Handle: RePEc:nbr:nberwo:5588

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  7. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April. [Downloadable!] (restricted)
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  10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
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  12. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation, Yale University. [Downloadable!]
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  14. Bonser-Neal, Catherine, et al, 1990. " International Investment Restrictions and Closed-End Country Fund Prices," Journal of Finance, American Finance Association, vol. 45(2), pages 523-47, June. [Downloadable!] (restricted)
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