Determining empirically behavioral and fundamental factors of discounts on closed end funds

Halkos, George (2005): Determining empirically behavioral and fundamental factors of discounts on closed end funds. Published in: Applied Financial Economics , Vol. 5, No. 16 (August 2006): pp. 395-404.

Abstract

Recent studies provide evidence that investors participating in the financial markets, decide for their actions using heuristics, according to their feelings and reacting to noise. In this paper, we extract two factors related to the variability of Premium/Discount (P/D): a behavioral and a fundamental. In our opinion Closed-End Funds represent a market where investor sentiment is one key reason for its existence. It seems that the structure of the closed end funds call for the existence of a discount. We provide evidence that using both factors we can achieve a better understanding of discounts as theories and the Closed End Funds Puzzle support it. We believe that one basic reason for that development is the fact that the CEFs being listed companies adds a second component of risk to the market risk that any investor undertakes by investing in a well-diversified portfolio.

• Item Type: MPRA Paper
• Language: English
• Keywords: Behavioral Finance; closed-end funds; premiums/discounts.
• Subjects: G - Financial Economics > G0 - General

References

Anderson, S.C. (1986) Closed-End Funds versus Market Efficiency, Journal of Portfolio Management, 13(1), 63-67.

Berndt, E.K., Hall, B.H., Hall, R.E., Hausmam, J.A. (1974) Estimation and inference in nonlinear structural models, Annals of Economic and Social Measurement 3/ 4, 653-665

Bollerslev, T. (1986) Conditional heteroskedasticity in time series of stock returns: evidence and forecasts, Journal of Business, 62, 55-80.

Bollerslev, T., Chou, R.Y., Kroner, K.F. (1992) ARCH modeling in finance, a review of the theory and empirical evidence, Journal of Econometrics, 52, 5-60.

Brauer, G. (1988) Closed-end Fund Shares Abnormal Returns and the Information Content of Discount and Premiums, Journal of Finance, 43, 113-127.

Brickley, J.A., Manaster, S. and Schallheim, J.S. (1991) The Tax Timing Option and the Discount on Closed-End Investment Companies, Journal of Business, 64, 287-312.

Cheng, A., Copeland, L. and O’Hanlon, J. (1994) Investment Trust Discounts and Abnormal Returns: UK Evidence, Journal of Business Finance and Accounting, 21, 813-831.

Deaves, R. and Krinsky, I. (1994) A Possible Reconciliation of some of the Conflicting Findings on Closed-End Fund Discounts: A Note, Journal of Business Finance and Accounting, 21, 1047-1057.

De Bondt, W.F.M. and Thaler, R. (1985) Does the stock market overreact?, Journal of Finance, 40, 739-805.

De Bondt, W.F.M. and Thaler, R. (1987) Further evidence on investor overreaction and stock market seasonality, Journal of Finance, 42, 557-581

De Long, J.B., Shleifer, A., Summers, L.H. and Waldmann, R.J. (1990a) Noise trader risk in markets, Journal of Political Economy, 98, 703-738

De Long, J.B., Shleifer, A., Summers, L.H. and Waldmann, R.J. (1990b) Positive feedback strategies and destabilizing national speculation, Journal of Finance 45, 379-395

Dimson, E. and Minio-Kozerski, C. (1998) Closed-End Funds: A Survey, IFA Working Paper 278-1998, (London Business School)

Dreman, D. (1978) Contrarian Investment Strategy, (Random House)

Dunteman, G.H. (1989) Principal Components Analysis, (Sage)

Engle, R.F. (1982) Autoregressive Conditional Heteroskedasticity, with Estimates of the Variance of United Kingdom Inflation, Econometrica, 50, 987-1008

Engle, R.F., Lilien, D.M., Robins, R.P. (1987) Estimating time varying risk premia in the term structure: The ARCH-M model, Econometrica, 55, 391-407

Engle, R.F., Ng, V.K. (1993) Measuring and testing the impact of news on volatility, The Journal of Finance, 48, 987-1007

Fama, E. and French, K. (1993) Common Risk Factors in Returns on Bonds and Stocks, Journal of Financial Economics, 33, 3-56

Gemmill, G. and Dylan, T. (2002) Noise Trading, Costly Arbitrage and Asset Prises: Evidence from Closed-end Funds, Journal of Finance, 27(6), 2571-2594

Greene, W. (2000) Econometric Analysis, (Prentice Hall International)

Gurmu, S., P. Rilstone and Stern, S. (1999) Semiparametric estimation of count regression models, Journal of Econometrics, 88(1), 123-150

Hong, H. and Stein, J. (1999) A unified theory of under reaction, momentum trading and overreaction in asset markets, Journal of Finance, 54, 2143-2184

Hong, H. (2000) A model of returns and trading futures markets, Journal of Finance, 55(2), 959-988

Johnson, R.A. and Wichern, D.W. (1998) Applied Multivariate Statistical Analysis, Fourth Edition, (Prentice Hall)

Lee, C.M.C., Shleifer, A. and Thaler, R.H. (1990) Anomalies: Closed-End Mutual Funds, Journal of Economic Perspectives, 4, 153-164

Lee, C.M.C., Shleifer, A. and Thaler, R.H. (1991) Investor sentiment and the closed-end fund puzzle, Journal of Finance, 46, 75-109

Leeflang, P., Wittink, D., Wedel, M. and Naert, P. (2000) Building models for marketing decisions, (Kluwer Academic Publishers)

Lowerstein, G., Weber, E., U., Hsee, C. K. and Welch, N. (2001) Risk as feelings, Pschycological Bulleting, 127, 267-286.

Malkiel, B.G. (1977) The Valuation of Closed-End Investment-Company Shares, Journal of Finance, 32, 847-858.

Minio-Paluello, C. (1998) The UK Closed-End Fund Discount, PhD Thesis, (London Business School)

Nofsinger, J. (2005) Social Mood and Financial Economics, The Journal of Behavioral Finance (accepted, to be published during 2005)

Richards, M., Fraser, D. and Groth, J. (1980) Winning Strategies for Closed End Funds, Journal of Portfolio Management, Fall, 50-55

Sharma, S. (1996) Applied Multivariate Techniques, (Wiley)

Schachter, S., Hood, D.C., Andreassen, P.B. and Gerin, W. (1986) Aggregate variables in psychology and economics: dependence and the stock market, in Gaild, B. and Kaish, S., eds., Handbook of Behavioral Economics, Part B, Vol. 2, Greenwich, 237-71

Shefrin, H. (2000) Recent developments in behavioral finance, Journal of Private Portfolio Management, Summer, 25-37

Shleifer, A. (2000) Inefficient Markets an Introduction to Behavioral Finance, (Oxford University Press)

Swaminathan, B. (1996) Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts, Review of Financial Studies, 9, 845-887.

Thompson, R. (1978) The Information Content of Discounts and Premiums on Closed-End fund Shares, Journal of Financial Economics, 6, 151-186

Weiss, K. (1989) The Post-Offering Price Performance of Closed-End Funds, Financial Management, 18 (3), 57-67.

Zweig, M. (1973) An Investor expectations Stock Predictive Model Using Closed-End Fund Premiums, Journal of Finance, 28, 67-78.