Skip to main content
SpringerLink
Log in

Identifying regime changes in closed-end fund discounts

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

In seeming contradiction of the efficient markets hypothesis, closed-end fund shares typically trade at discounts to their portfolio values. We find that about half of these discounts are nonstationary. Focusing only on those funds that have stationary discounts, this study applies the Bai and Perron (1998, 2003a,b) methodology to test for structural breaks in the mean discounts. Virtually all have structural breaks, and our findings contradict previous studies that indicate closed-end fund discounts revert to a long-term mean value. The data indicate that closed-end fund trading strategies are more risky than they superficially appear. As structural breaks in mean discounts do not occur together, our analysis does not find support for a common factor (possibly investor sentiment) causing these breaks.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Anderson, S.C. 1986. “Closed-End Funds Versus Market Efficiency.”Journal of Portfolio Management 13: 50–55.

    Google Scholar 

  • Anderson, S.C., B.J. Coleman, and J.A. Born. 2001. “A Closer Look at Trading Strategies for U.S. Equity Closed-End Investment Companies.”Financial Services Review 10: 237–248.

    Article  Google Scholar 

  • Bai, J. and P. Perron. 1998. “Estimating and Testing Linear Models with Multiple Structural Changes.”Econometrica 66: 47–68.

    Article  Google Scholar 

  • Bai, J. and P. Perron. 2003a. “Computation and Analysis of Multiple Structural Change Models.”Journal of Applied Econometrics 18: 1–22.

    Article  Google Scholar 

  • Bai, J. and P. Perron. 2003b. “Critical Values in Multiple Structural Change Tests.”Econometrics Journal 6: 72–78.

    Article  Google Scholar 

  • Bai, J. and P. Perron. 2004. “Multiple Structural Change Models: A Simulation Study.” InEconometric Essays, edited by D. Corbea, S. Durlauf, and B.E. Hansen. Cambridge Univ. Press.

  • Brauer, G.A. and E.C. Chang. 1990. “Return Seasonality In Stocks and Their Underlying Assets: Tax-Loss Selling Versus Information Explanations.”Review of Financial Studies 3: 255–280.

    Article  Google Scholar 

  • Brown, G.W. 1999. “Volatility, Sentiment, and Noise Traders.”Financial Analysts Journal 55: 82–90.

    Article  Google Scholar 

  • Brown, G.W. and M.T. Cliff. 2004. “Investor Sentiment and the Near-Term Stock Market.”Journal of Empirical Finance 11: 1–27.

    Article  Google Scholar 

  • Cakici, N., A. Tessitore, and N. Usmen. 2000. “Closed-End Equity Funds: Betting on Discounts and Premiums.”Journal of Investing 9: 83–92.

    Google Scholar 

  • Cakici, N., A. Tessitore, and N. Usmen. 2002. “Closed-End Funds and Turnover Restrictions.”Financial Analysts Journal 58: 74–81.

    Article  Google Scholar 

  • Chen, N., R. Kan, and M.H. Miller. 1993. “Are the Discounts on Closed-End Funds a Sentiment Index?”Journal of Finance 48: 795–800.

    Article  Google Scholar 

  • Chopra, N., C.M.C. Lee, A. Shleifer, and R.H. Thaler. 1993. “Yes, Discounts on Closed-End Funds are a Sentiment Index.”Journal of Finance 48: 801–808.

    Article  Google Scholar 

  • De Long, J.B., A. Shleifer, L.H. Summers, and R.J. Waldmann. 1990. “Noise Trader Risk in Financial Markets.”Journal of Political Economy 98: 703–738.

    Article  Google Scholar 

  • Elton, E.J., M.j. Gruber, and J.A. Busse. 1998. “Do Investors Care About Sentiment?”Journal of Business 71: 477–500.

    Article  Google Scholar 

  • Gasbarro, D., R.D. Johnson, and J.K. Zumwalt. 2003. “Evidence on the Mean-Reverting Tendencies of Closed-End Fund Discounts.”The Financial Review 38: 273–291.

    Article  Google Scholar 

  • Gemmill, G. and D.C. Thomas. 2002. “Noise Trading, Costly Arbitrage, and Asset Prices: Evidence from Closed-End Funds.”Journal of Finance 57: 2571–2594.

    Article  Google Scholar 

  • Hughen, J.C., and C.G. McDonald. 2005. “Who are the Noise Traders?”Journal of Financial Research 28: 281–298.

    Article  Google Scholar 

  • Johansen, S. 1988. “Statistical Analysis of Cointegrating Vectors.”Journal of Economic Dynamics and Control 12: 231–254.

    Article  Google Scholar 

  • Leonard, D.C. and D.M. Shull. 1996. “Investor Sentiment and the Closed-End Fund Evidence: Impact of the January Effect.”Quarterly Review of Economics and Finance 36: 117–26.

    Article  Google Scholar 

  • Lee, C.M.C., A. Shleifer, and R.H. Thaler. 1991. “Investor Sentiment and the Closed-End Fund Puzzle.”Journal of Finance 46: 75–109.

    Article  Google Scholar 

  • Malkiel, B. 1977. “The Valuation of Closed-End Investment-Company Shares.”Journal of Finance 32: 847–859.

    Article  Google Scholar 

  • Ng, S. and P. Perron. 2001. “Unit Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power.”Econometrica 69: 1519–1554.

    Article  Google Scholar 

  • Pontiff, J. 1995. “Closed-End Fund Premia and Returns: Implication for Financial Market Equilibrium.”Journal of Financial Economics 37: 341–70.

    Article  Google Scholar 

  • Rapach, D., and M.E. Wohar. 2005. “Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?”Journal of Money, Credit and Banking 37: 887–906.

    Article  Google Scholar 

  • Richards, R.M., D.R. Fraser, and J.C. Groth. 1980. “Winning Strategies for Closed-End Funds.”Journal of Portfolio Management 7: 50–55.

    Article  Google Scholar 

  • Sias, R.W. 1997. “Optimum Trading Strategies for Closed-End Funds.”Journal of Investing 6: 54–61.

    Article  Google Scholar 

  • Swaminathan, B. 1996. “Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts.”Review of Financial Studies 9: 845–887.

    Article  Google Scholar 

  • Thompson, R. 1978. “The Information Content of Discounts and Premiums on Closed-End Fund Shares.”Journal of Financial Economics 6: 151–86.

    Article  Google Scholar 

  • Wang, Y., A. Keswani, and S.J. Taylor. 2004. “The Relationships Between Sentiment, Returns, and Volatility.”Working Paper (Lancaster University, Lancaster, U.K.).

    Google Scholar 

  • Weiss, K. 1989. “The Post-Offering Price Performance of Closed-End Funds.”Financial Management 18: 57–67.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Reiman School of Finance, Daniels College of Business, University of Denver, 2101 S. University Boulevard, 80208, Denver, CO

    J. Christopher Hughen

  2. Department of Economics, University of Nebraska-Omaha, RH 512K, 68182-0286, Omaha, NE

    Mark E. Wohar

Authors
  1. J. Christopher Hughen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Mark E. Wohar
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mark E. Wohar.

Additional information

The results reported in this paper were generated using GAUSS 3.6.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Hughen, J.C., Wohar, M.E. Identifying regime changes in closed-end fund discounts. J Econ Finan 30, 115–132 (2006). https://doi.org/10.1007/BF02834279

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02834279

Keywords

Search

Navigation