Costly arbitrage and asset prices: evidence from closed-end funds
Gemmill, Gordon and Thomas, D. C. (Dylan C.) (2002) Costly arbitrage and asset prices: evidence from closed-end funds. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.02-).
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If arbitrage is costly and noise traders are active, asset prices may deviate from fundamental values for long periods of time. We use a sample of 158 closed-end funds to show that noise-trader sentiment, as proxied by retail-investor flows, leads to fluctuations in the discount. Nevertheless, we reject the hypothesis that noise-trader risk is the cause of the long-run discount. Instead we find that funds which are more difficult to arbitrage have larger discounts, due to: (i) the censoring of the discount by the arbitrage bounds, and (ii) the freedom of managers to increase charges when arbitrage is costly.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Arbitrage -- Mathematical models, Accounting and price fluctuations, Assets (Accounting), Closed-end funds|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Number of Pages:||44|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Ammer, John, 1990, Expenses, yields and excess returns: New evidence on closed end fund discounts from the U.K., Discussion paper 108, Financial Markets Group, London School of Economics.
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