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Arbitrage in Closed-end Funds: New Evidence

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Arbitrage pressures that could equalize closed-end fund share prices with fund portfolio values appear to be largely absent in an extensive data set. Observed fund behavior violates the static arbitrage bounds of Gemmill and Thomas (2002) and is inconsistent with the dynamic arbitrage bounds of Pontiff (1996). Furthermore, Fama and French (1992) regressions run on arbitrage portfolios designed to profit from closed-end fund mispricings generate excess returns that are either significantly negative or insignificantly different from zero, suggesting that arbitrageurs lack a profit incentive. If arbitrage is absent, observed fund pricing behavior likely reflects changing investor sentiment about fund prospects.

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Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 57.

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Date of creation: Jan 2004
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Handle: RePEc:vas:papers:57

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  1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers, University of California at Berkeley, Economics Department _124, University of California at Berkeley, Economics Department.
  2. 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.
  3. Eli Ofek & Matthew Richardson & Robert F. Whitelaw, 2003. "Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets," NBER Working Papers 9423, National Bureau of Economic Research, Inc.
  4. Chen, Nai-fu & Kan, Raymond & Miller, Merton H, 1993. " Are the Discounts on Closed-End Funds a Sentiment Index?," Journal of Finance, American Finance Association, American Finance Association, vol. 48(2), pages 795-800, June.
  5. 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.
  6. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  7. Sugato Chakravarty & Asani Sarkar, 1999. "Liquidity in U.S. fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets," Staff Reports, Federal Reserve Bank of New York 73, Federal Reserve Bank of New York.
  8. Zweig, Martin E, 1973. "An Investor Expectations Stock Price Predictive Model Using Closed-End Fund Premiums," Journal of Finance, American Finance Association, American Finance Association, vol. 28(1), pages 67-78, March.
  9. Pontiff, Jeffrey, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(4), pages 1135-51, November.
  10. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  11. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1990. "Closed-End Mutual Funds," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(4), pages 153-64, Fall.
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