 Trend Breaks and the Persistence of Closed-End Fund DiscountsNazif Durmaz, Hyeongwoo Kim (), Hyejin Lee and Yanfei Sun No auwp2023-08, 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). This occurrence is puzzling, given that NAVs are openly accessible to the public for CEFs, which essentially consist of repackaged financial assets. The persistence of these deviations is particularly notable when using linear models, suggesting the need for nonlinear models to comprehend this phenomenon known as the CEF discount puzzle. To unravel this puzzle, we employ the RALS-LM framework, enabling the identification of multiple endogenously chosen trend-breaks, and conduct an analysis utilizing data from 31 CEF discounts. Our findings reveal that CEF prices tend to fluctuate around time-varying trends, which aligns with the characteristics of regime switching models. Additionally, we demonstrate that incorporating non-normal errors through moment conditions enhances efficiency at the margin. Moreover, we establish that nonlinearity solely in the form of level shifts falls short in explaining the persistent nature 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) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:abn:wpaper:auwp2023-08 Access Statistics for this paper More papers in Auburn Economics Working Paper Series from Department of Economics, Auburn University Contact information at EDIRC. |
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