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Risk, Managerial Skill and Closed-End Fund Discounts

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  • Michael Bleaney
  • R. Todd Smith

Abstract

Empirical evidence from the UK market is brought to bear on recent theories of closed-end fund discounts. Market pricing of skill, relative to the fees charged for it, accounts for a significant portion of discount variation, but cannot explain the rarity of index funds or why they trade at a discount. Index funds have lower discount volatility. Discount risk is much more systematic on international than on domestic funds. It is argued that even idiosyncratic risk is priced in closed-end funds, because they are likely to represent a significant proportion of investors’ risky portfolios.

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Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 08/10.

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Handle: RePEc:not:notecp:08/10

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Keywords: Closed-end fund; fund management; systematic risk;

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  1. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 75-109, March.
  3. Gordon Gemmill & Dylan C. Thomas, 2006. "The Impact of Corporate Governance on Closed-end Funds," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 12(5), pages 725-746.
  4. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 155-69, March.
  5. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198292272, October.
  6. Steven A. Ross, 2002. "Neoclassical Finance, Alternative Finance and the Closed End Fund Puzzle," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 8(2), pages 129-137.
  7. Elton, Edwin J & Gruber, Martin J & Rentzler, Joel, 1989. "New Public Offerings, Information, and Investor Rationality: The Case of Publicly Offered Commodity Funds," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 62(1), pages 1-15, January.
  8. Kim, Youngsoo & Lee, Bong Soo, 2007. "Limited participation and the closed-end fund discount," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(2), pages 381-399, February.
  9. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 483-510, July.
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