Noise-trading, Costly Arbitrage, and Asset Prices: Evidence from US Closed-end Funds

Sean Flynn

No 71, Vassar College Department of Economics Working Paper Series from Vassar College Department of Economics

Abstract: The behavior of US closed-end funds is very different from that of the UK funds studied by Gemmill and Thomas (2002). There is no evidence that their discounts are constrained by arbitrage barriers, no evidence that higher expenses increase discounts and no evidence that replication risk increases discounts—but strong evidence that noise-trader risk is priced. The differences between US and UK funds may be due to the fact that small investors dominate US funds while institutional investors dominate UK funds, or because the sample selection method for the UK funds chooses only funds that are relatively easy to arbitrage.

Date: 2005-09
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Journal Article: Noise-trading, costly arbitrage, and asset prices: Evidence from US closed-end funds (2012)
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