Closed-End Funds, Market Description and the Behavioral Explanation of the Discount

Abstract

Closed-End funds cover approximately 40% of the Investment Funds, in the world market, that reached US dollars 11,7 trillion at the end of 2002. The market is captured by the US and EU Investment Funds that cover almost 95% of total assets. Existing since 1868, Closed-End Funds offer most of the advantages of the collective investments, and one threat that can prove to be an important opportunity: The Discount to the Net Asset Value (NAV) that they usually trade. The discount threat, can lead to superior total returns and this is one of the reasons why this small collective investment market still exists. We focus on the behavioural explanation of the discount puzzle, as it explains also the existence of periods or funds that are sold or traded at prices higher to their NAV.

Keywords: Behavioral Finance, Closed-end Funds, Premium/Discount

JEL Classification: G23, L89