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Determining empirically behavioral and fundamental factors of discounts on closed end funds

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  • Halkos, George

Abstract

Recent studies provide evidence that investors participating in the financial markets, decide for their actions using heuristics, according to their feelings and reacting to noise. In this paper, we extract two factors related to the variability of Premium/Discount (P/D): a behavioral and a fundamental. In our opinion Closed-End Funds represent a market where investor sentiment is one key reason for its existence. It seems that the structure of the closed end funds call for the existence of a discount. We provide evidence that using both factors we can achieve a better understanding of discounts as theories and the Closed End Funds Puzzle support it. We believe that one basic reason for that development is the fact that the CEFs being listed companies adds a second component of risk to the market risk that any investor undertakes by investing in a well-diversified portfolio.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49280.

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Date of creation: Mar 2005
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Publication status: Published in Applied Financial Economics 16.5(2006): pp. 395-404
Handle: RePEc:pra:mprapa:49280

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Keywords: Behavioral Finance; closed-end funds; premiums/discounts.;

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References

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  1. Swaminathan, Bhaskaran, 1996. "Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 845-87.
  2. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
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  4. Thompson, Rex, 1978. "The information content of discounts and premiums on closed-end fund shares," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 151-186.
  5. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
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  7. Charles Lee & Andrei Shleifer & Richard Thaler, 1990. "Investor Sentiment and the Closed-End Fund Puzzle," NBER Working Papers 3465, National Bureau of Economic Research, Inc.
  8. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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  10. Gordon Gemmill & Dylan C. Thomas, 2002. "Noise Trading, Costly Arbitrage, and Asset Prices: Evidence from Closed-end Funds," Journal of Finance, American Finance Association, vol. 57(6), pages 2571-2594, December.
  11. Gurmu, Shiferaw & Rilstone, Paul & Stern, Steven, 1998. "Semiparametric estimation of count regression models1," Journal of Econometrics, Elsevier, vol. 88(1), pages 123-150, November.
  12. Zweig, Martin E, 1973. "An Investor Expectations Stock Price Predictive Model Using Closed-End Fund Premiums," Journal of Finance, American Finance Association, vol. 28(1), pages 67-78, March.
  13. Brickley, James A & Manaster, Steven & Schallheim, James, 1991. "The Tax-Timing Option and the Discounts on Closed-End Investment Companies," The Journal of Business, University of Chicago Press, vol. 64(3), pages 287-312, July.
  14. Malkiel, Burton G, 1977. "The Valuation of Closed-End Investment-Company Shares," Journal of Finance, American Finance Association, vol. 32(3), pages 847-59, June.
  15. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
  16. Harrison Hong, 2000. "A Model of Returns and Trading in Futures Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 959-988, 04.
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