Date of Submission

Spring 2013

Academic Program

Psychology; Economics and Finance; Psychology

Project Advisor 1

Dimitri Papadimitriou

Project Advisor 2

Stuart Levine

Abstract/Artist's Statement

This project discusses the “closed-end fund puzzle,” a term that refers to the persistent but volatile discounts, distinctive for closed-end mutual funds (CEFs). These securities have prices that are typically lower (and in some cases higher) than the underlying net asset value (NAV), a phenomenon which contradicts the value-additive principle. The aim of this paper is to discuss in detail the nature and history of closed-end funds and to examine their pricing paradox. An overview of explanatory factors rooted in the Efficient Market Hypothesis (EMH) is offered, with a focus on agency cost, tax liability, and miscalculation of the NAV. Since the conventional framework does not provide a satisfactory justification for the existence of discounts, behavioral theories are also presented. Accounting for both frameworks, this project attempts to test how several factors affect discount fluctuations over time with an emphasis on impact of news reports.

A sample of six closed-country funds is examined. Through regression analysis (time series and panel data) the impact of five predictor factors was established. The main question of interest was whether news releases relevant to the sample of funds would affect behavior of discounts. For this purpose, two types of news were tested – salient media reports and announcements regarding the company’s fundamentals. Obtained results indicated that in weeks when either type of news was released, on average CEF discounts fluctuated more. Nevertheless, an interaction between the news dummies and main variables proved to diminish the registered effect of price volatility and trading volume.

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