Exchange-Traded Fund Introductions and Closed-End Discounts and Volume

Financial Review, Forthcoming

34 Pages Posted: 8 Sep 2009 Last revised: 29 Sep 2009

See all articles by Scott W. Barnhart

Scott W. Barnhart

Florida Atlantic University

Stuart Rosenstein

Inner Banks Financial Analysis, LLC

Date Written: September 6, 2009

Abstract

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.

Keywords: closed-end funds, exchange-traded funds, substitution effect, discounts, trading volume.

JEL Classification: G11, G12, G14

Suggested Citation

Barnhart, Scott W. and Rosenstein, Stuart, Exchange-Traded Fund Introductions and Closed-End Discounts and Volume (September 6, 2009). Financial Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1469304

Scott W. Barnhart (Contact Author)

Florida Atlantic University ( email )

Dept. of Finance 5353 Parkside Drive
Jupiter, FL 33431
United States
561-799-8512 (Phone)

Stuart Rosenstein

Inner Banks Financial Analysis, LLC ( email )

407 Winchester Dr
Greenville, NC 27858
United States

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