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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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    3. 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.
    4. Zweig, Martin E, 1973. "An Investor Expectations Stock Price Predictive Model Using Closed-End Fund Premiums," Journal of Finance, American Finance Association, vol. 28(1), pages 67-78, March.
    5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    6. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1990. "Closed-End Mutual Funds," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 153-164, Fall.
    7. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    8. 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, vol. 48(2), pages 795-800, June.
    9. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, vol. 87(1), pages 155-169, March.
    10. Jeffrey Pontiff, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1135-1151.
    11. 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.
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