Gemmill, Gordon and Thomas, D. C. (Dylan C.) (2002) Costly arbitrage and asset prices: evidence from closed-end funds. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

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
Date:	2002
Number:	No.02-
Number of Pages:	44
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/1804

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