Exchange-Traded Fund Introductions and Closed-End Discounts and Volume
Scott W. Barnhart
Florida Atlantic University
Inner Banks Financial Analysis, LLC
September 6, 2009
Financial Review, Forthcoming
Until the advent of exchange-traded funds (ETFs), closed-end funds (CEFs) were the only professionally managed portfolios suitable for non-accredited investors that could be traded like individual stocks. We hypothesize that the introduction of an ETF in an asset class similar to an existing CEF will result in a substitution effect that will reduce the value of the CEF’s shares relative to the value of its underlying assets. Our event-studies show that upon the introduction of a similar ETF, CEF discounts widen significantly and relative volume declines significantly. Single-equation and systems estimation models show that the widening in discounts and reduction in volume are both related to returns-based measures of the substitutability of ETFs for CEFs.
Number of Pages in PDF File: 34
Keywords: closed-end funds, exchange-traded funds, substitution effect, discounts, trading volume.
JEL Classification: G11, G12, G14Accepted Paper Series
Date posted: September 8, 2009 ; Last revised: September 29, 2009
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