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On the Time-Varying Relationship between Closed-End Fund Prices and Fundamentals: Bond vs. Equity Funds

Author

Listed:
  • Seth Anderson
  • T. Randolph Beard
  • Hyeongwoo Kim
  • Liliana Stern

Abstract

Deviations between closed-end investment fund share prices and underlying net asset values represent a historically important anomaly requiring theoretical explanation. In this article, we provide evidence that the processes generating prices and NAVs differ among fund types, implying that explanations of mispricing will necessarily be somewhat parochial. Using a multivariate GARCH model for estimated common factors, we empirically examine discounts of both equity and bond funds, and we find an important asymmetry between them. In particular, we show a structural break in this relationship for bond funds after the Lehman bankruptcy and suggest an explanation based on persistence in NAVs arising from market illiquidity.

Suggested Citation

  • Seth Anderson & T. Randolph Beard & Hyeongwoo Kim & Liliana Stern, 2011. "On the Time-Varying Relationship between Closed-End Fund Prices and Fundamentals: Bond vs. Equity Funds," Auburn Economics Working Paper Series auwp2011-07, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2011-07
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    File URL: http://cla.auburn.edu/econwp/Archives/2011/2011-07.pdf
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    Keywords

    Closed End Investment Company; Market Efficiency; Market Illiquidity; Dynamic Conditional Correlation;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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