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Closed-end Fund Discounts and Interest Rates: Positive Covariance in US Data after 1985

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Author Info
Flynn, Sean M. () (Vassar College Department of Economics)

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Abstract

Previous papers find no relationship between interest rates and the discounts of US closed-end funds before 1985. This is taken as evidence against management fees being a cause of discounts because a negative relationship is expected: if interest rates rise, you would expect to see discounts fall as the present value of future fees is reduced. But from 1985 forward, there has been a strong positive relationship between interest rates and discounts. This supports an alternative view in which the discount varies positively with interest rates because bond yields are an alternative return against which closed-end funds must compete.

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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 73.

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Date of creation: Sep 2005
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Handle: RePEc:vas:papers:73

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  1. Flynn, Sean M., 2005. "Noise-trading, Costly Arbitrage, and Asset Prices: Evidence from US Closed-end Funds," Vassar College Department of Economics Working Paper Series 71, Vassar College Department of Economics. [Downloadable!]
  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, vol. 46(1), pages 75-109, March. [Downloadable!] (restricted)
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  3. Pontiff, Jeffrey, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1135-51, November. [Downloadable!] (restricted)
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This page was last updated on 2009-12-2.

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