Investor Reaction to Salient News in Closed-End Country Funds

40 Pages Posted: 26 Jul 2000 Last revised: 25 Mar 2008

See all articles by Peter Klibanoff

Peter Klibanoff

Northwestern University - Kellogg School of Management

Owen A. Lamont

Harvard University - Department of Economics

Thierry A. Wizman

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: May 1996

Abstract

We provide a model of closed-end fund pricing which includes investors who do not form expectations correctly and allows for salient country-specific news to affect this expectation formation process. We use panel data on prices and net asset values of closed- end country funds to examine investor reaction to news that affects fundamentals, and measure the response of the idiosyncratic change in fund prices to the idiosyncratic change in fund asset values. In a typical week, US prices underreact to changes in foreign fundamentals; the (short-run) elasticity of price with respect to asset value is significantly less than one. In weeks with major news (relevant to the specific country) appearing on the front page of The New York Times, prices react much more to fundamentals; the elasticity of price with respect to asset value is closer to one. These results are roughly consistent with the hypothesis that major news events lead some investors who normally lag behind in updating their expectations to temporarily react more quickly.

Suggested Citation

Klibanoff, Peter and Lamont, Owen A. and Wizman, Thierry A., Investor Reaction to Salient News in Closed-End Country Funds (May 1996). NBER Working Paper No. w5588. Available at SSRN: https://ssrn.com/abstract=225535

Peter Klibanoff (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5153 (Phone)
847-467-1220 (Fax)

Owen A. Lamont

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Thierry A. Wizman

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
New York, NY 10045
United States

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