Diversification in lottery-like features and portfolio pricing discount: Evidence from closed-end funds

Xin Liu

Journal of Empirical Finance, 2021, vol. 62, issue C, 1-11

Abstract: Why do portfolios often trade at discounts relative to the sum of their components? I provide a new explanation based on the diversification in lottery-like features. I argue that portfolios trade at discounts when their components exhibit a strong lottery-like feature but a low tendency of producing extreme payoffs together. This discount can be partially mitigated if lottery-like components tend to produce extreme payoffs at the same time. I use the closed-end fund setting to provide empirical supports for this explanation. My findings support prospect theory from an alternative perspective and provide a novel explanation for the closed-end fund puzzle.

Keywords: Closed-end fund discount; Cumulative prospect theory; Diversification; Lottery-like feature; CoMax (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 G40 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:62:y:2021:i:c:p:1-11

DOI: 10.1016/j.jempfin.2021.02.001

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