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Arbitrage in Closed-end Funds: New Evidence

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Abstract

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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  • Flynn, Sean Masaki, 2004. "Arbitrage in Closed-end Funds: New Evidence," Vassar College Department of Economics Working Paper Series 57, Vassar College Department of Economics.
    • Handle: RePEc:vas:papers:57
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