The Forecasting Power of Emerging Market Closed-end Fund Discounts and Capital Market Segmentation

Abstract:     
Using monthly data from 1989 to 2001 for a sample of ten emerging market closed-end funds, we study the time-series relationship between fund discounts/premiums and future net asset value (NAV) and share price (SP) returns. Unlike previous studies, we find that discounts/premiums forecast both SP and NAV returns with the forecasting power of the latter being stronger. Additional tests show that the fund discounts/premiums contain information about future macroeconomic factors of their corresponding emerging markets. We also document a strong association between expectations of future macroeconomic conditions and the difference in SP and NAV returns. Our results provide support for a rational market segmentation explanation of the discounts/premiums in emerging market closed-end funds and they are not consistent with a straight forward investor sentiment explanation.

Number of Pages in PDF File: 35

Keywords: Closed-end funds, Emerging markets, Capital market segmentation, Investor sentiment

JEL Classification: G15

working papers series