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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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Bibliographic Info

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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Web page: http://www.nottingham.ac.uk/economics/
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Keywords: Closed-end fund; fund management; systematic risk;

References

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  1. Steven A. Ross, 2002. "Neoclassical Finance, Alternative Finance and the Closed End Fund Puzzle," European Financial Management, European Financial Management Association, vol. 8(2), pages 129-137.
  2. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
  3. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
  4. 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, vol. 62(1), pages 1-15, January.
  5. Gordon Gemmill & Dylan C. Thomas, 2006. "The Impact of Corporate Governance on Closed-end Funds," European Financial Management, European Financial Management Association, vol. 12(5), pages 725-746.
  6. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, September.
  7. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, vol. 87(1), pages 155-69, March.
  8. 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.
  9. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
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