Predictability and Reasonableness of Discounts and Premiums on Closed-End Funds

Author(s)

Darshana Palkar, Nova Southeastern UniversityFollow
Peter C. Stimes
Stephen E. Wilcox

Document Type

Article

Publication Title

The Journal of Investing

ISSN

1068-0896

Publication Date

2014

Abstract/Excerpt

This article presents a mathematical model for explaining the premiums and discounts to net asset value for closed-end funds. The model does not require (1) constraining assumptions about the underlying price, liquidity, and volatility paths of securities held in the funds, or (2) differential market knowledge between fund investors and fund managers. Our empirical tests show that the observed discounts and premiums for seasoned U.S. closed-end funds are consistent with the model’s explicit predictions regarding payout policy and the relative performance of underlying fund holdings. Consistent with the implicit predictions of the model, our results show that fund size, sentiment, and liquidity also affect how a closed-end fund trades.

DOI

10.3905/joi.2014.23.4.057

Volume

23

Issue

4

First Page

57

Last Page

73

NSUWorks Citation

Palkar, Darshana; Stimes, Peter C.; and Wilcox, Stephen E., "Predictability and Reasonableness of Discounts and Premiums on Closed-End Funds" (2014). HCBE Faculty Articles. 774.
https://nsuworks.nova.edu/hcbe_facarticles/774