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Noise-trading, Costly Arbitrage, and Asset Prices: Evidence from US Closed-end Funds

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Abstract

The behavior of US closed-end funds is very different from that of the UK funds studied by Gemmill and Thomas (2002). There is no evidence that their discounts are constrained by arbitrage barriers, no evidence that higher expenses increase discounts and no evidence that replication risk increases discounts—but strong evidence that noise-trader risk is priced. The differences between US and UK funds may be due to the fact that small investors dominate US funds while institutional investors dominate UK funds, or because the sample selection method for the UK funds chooses only funds that are relatively easy to arbitrage.

Suggested Citation

  • 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.
  • Handle: RePEc:vas:papers:71
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    References listed on IDEAS

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    1. Brauer, Greggory A., 1984. "`Open-ending' closed-end funds," Journal of Financial Economics, Elsevier, vol. 13(4), pages 491-507, December.
    2. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    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. Boudreaux, Kenneth J, 1973. "Discounts and Premiums on Closed-End Mutual Funds: A Study in Valuation," Journal of Finance, American Finance Association, vol. 28(2), pages 515-522, May.
    5. Brickley, James A. & Schallheim, James S., 1985. "Lifting the Lid on Closed-End Investment Companies: A Case of Abnormal Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(01), pages 107-117, March.
    6. Sean Masaki Flynn, 2010. "Short Selling And Mispricings When Fundamentals Are Known: Evidence From Nyse‐Traded Closed‐End Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 463-486, December.
    7. 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.
    8. Steven A. Ross, 2002. "Neoclassical Finance, Alternative Finance and the Closed End Fund Puzzle," European Financial Management, European Financial Management Association, vol. 8(2), pages 129-137.
    9. Peavy, John W, III, 1990. "Returns on Initial Public Offerings of Closed-End Funds," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 695-708.
    10. 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.
    11. Thompson, Rex, 1978. "The information content of discounts and premiums on closed-end fund shares," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 151-186.
    12. Gordon Gemmill & Dylan C. Thomas, 2002. "Noise Trading, Costly Arbitrage, and Asset Prices: Evidence from Closed-end Funds," Journal of Finance, American Finance Association, vol. 57(6), pages 2571-2594, December.
    13. Chopra, Navin, et al, 1993. " Yes, Discounts on Closed-End Funds Are a Sentiment Index," Journal of Finance, American Finance Association, vol. 48(2), pages 801-808, June.
    14. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, vol. 87(1), pages 155-169, March.
    15. Levis, Mario & Thomas, Dylan C., 1995. "Investment trust IPOs: Issuing behaviour and price performance Evidence from the London Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1437-1458, November.
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    Cited by:

    1. Davies, Richard & Fletcher, Mary & Marshall, Andrew, 2013. "Investigating the role of illiquidity in explaining the UK closed-end country fund discount," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 121-130.
    2. Flynn, Sean M., 2005. "Closed-end Fund Discounts and Interest Rates: Positive Covariance in US Data after 1985," Vassar College Department of Economics Working Paper Series 73, Vassar College Department of Economics.
    3. Stylianos X. Koufadakis, 2016. "Mispricing Explanations of Closed-End Funds: A Survey Review," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(1-2), pages 108-135, January-J.
    4. Stylianos X. Koufadakis, 2015. "Asymmetries on Closed End Country Funds Premium and Monetary Policy Announcements: An Approach Trough the Perspective of Foreign Countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 29-65, july-Dece.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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