Identifying regime changes in closed-end fund discounts

J. Hughen () and Mark Wohar

Journal of Economics and Finance, 2006, vol. 30, issue 1, 115-132

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. Copyright Academy of Economics and Finance 2006

Date: 2006
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DOI: 10.1007/BF02834279

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