Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts

Nazif Durmaz, Hyeongwoo Kim (gmmkim@gmail.com), Hyejin Lee and Yanfei Sun

No auwp2023-03, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: Closed-end fund (CEF) prices often exhibit large and persistent deviations from their associated net asset values (NAVs), which is puzzling since CEFs are repackaged financial assets and NAVs are publicly observable. We point out that such high persistence is mainly observed when linear models are employed, calling for nonlinear models to understand this so-called CEF discount puzzle. Applying the RALS-LM framework that allows for multiple endogenously identified trend-breaks for 31 CEF discount data, we show that CEF prices tend to fluctuate around time-varying time trends, which can be consistent with a regime switching model. We also demonstrate that utilizing non-normal errors through moment conditions enhances the efficiency at the margin. Nonlinearity with level shifts only fails to explain the observed persistence of CEF discounts.

Keywords: Closed-End Fund; CEF Discount Puzzle; Residual Augmented Least Squares; Non-Normal Error; Trend Breaks (search for similar items in EconPapers)
JEL-codes: C22 G12 G15 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-des, nep-ets and nep-mac
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Working Paper: Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts (2023)
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