Matthew Spiegel (University of California at Berkeley)
Abstract
Nearly any standard financial model concludes that two assets with identical cash flows must sell for the same price. Alas, closed-end mutual fund company share prices seem to violate this fundamental tenant. Even when one considers several standard frictions, such as taxes and agency costs, classical financial models cannot explain the large persistent discounts found within the data. While the standard financial markets model may not explain the existence of large closed- end fund discounts, this paper shows that a rather close version of it does. In an otherwise frictionless market, if asset supplies vary randomly over time and agents posses finite lives a closed-end mutual fund's stock price may not track its net asset value. Furthermore, the analysis provides a number of conditions under which these discrepancies will lead to the existence of systematic discounts for the mutual fund's shares. In addition, the model provides predictions regarding the correlation between current closed-end fund discounts and current changes in stock prices and future changes in corporate productivity. As the analysis shows the same parameter values that lead to systematic discounts also lead to other fund price characteristics that resemble many of the results found within empirical studies.
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Publisher Info
Paper provided by EconWPA in its series Finance with number
9712002.
Length: 39 pages Date of creation: 08 Dec 1997 Date of revision: Handle: RePEc:wpa:wuwpfi:9712002
Note: Type of Document - PDF; prepared on IBM PC; to print on LaserJet 4P, or Adobe Acrobat Compatible Printer; pages: 39; figures: included. None Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: G1 - Financial Economics - - General Financial Markets D5 - Microeconomics - - General Equilibrium and Disequilibrium
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dow, James & Gorton, Gary, 1994.
" Arbitrage Chains,"
Journal of Finance,
American Finance Association, vol. 49(3), pages 819-49, July.
[Downloadable!] (restricted)
Other versions:
James Dow & Gary Gorton, 1993.
"Arbitrage Chains,"
NBER Working Papers
4314, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
James Dow & Gary Gorton, 1993.
"Arbitrage Chains,"
CEPR Financial Markets Paper
0035, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)