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

Nazif Durmaz, Hyeongwoo Kim (), Hyejin Lee and Yanfei Sun

MPRA Paper from University Library of Munich, Germany

Abstract: Closed-end fund (CEF) prices often exhibit large and persistent deviations from their associated net asset values (NAVs), which is puzzling considering that NAVs are publicly observable for CEFs, which essentially represent 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)
JEL-codes: C22 G12 G15 (search for similar items in EconPapers)
Date: 2023-06-30
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https://mpra.ub.uni-muenchen.de/117789/1/RALS%20Mutual%20Fund%20June%202023.pdf original version (application/pdf)

Related works:
Working Paper: Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:117789

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