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On the Time-Varying Relationship between Closed-End Fund Prices and Fundamentals: Bond vs. Equity Funds

Seth Anderson, Thomas Beard, Hyeongwoo Kim () and Liliana Stern

No auwp2011-07, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: Deviations between closed-end investment fund share prices and underlying net asset values represent a historically important anomaly requiring theoretical explanation. In this article, we provide evidence that the processes generating prices and NAVs differ among fund types, implying that explanations of mispricing will necessarily be somewhat parochial. Using a multivariate GARCH model for estimated common factors, we empirically examine discounts of both equity and bond funds, and we find an important asymmetry between them. In particular, we show a structural break in this relationship for bond funds after the Lehman bankruptcy and suggest an explanation based on persistence in NAVs arising from market illiquidity.

Keywords: Closed End Investment Company; Market Efficiency; Market Illiquidity; Dynamic Conditional Correlation (search for similar items in EconPapers)
JEL-codes: C32 G01 G12 (search for similar items in EconPapers)
Date: 2011-07
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