What Moves the Discount on Country Equity Funds?

78 Pages Posted: 12 Jun 2000 Last revised: 30 Jun 2010

See all articles by Gikas A. Hardouvelis

Gikas A. Hardouvelis

University of Piraeus; Centre for Economic Policy Research (CEPR)

Rafael La Porta

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Thierry A. Wizman

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: December 1993

Abstract

The paper characterizes several empirical regularities of closed- end fund prices and examines the extent to which a 'sentiment' model of asset prices is consistent with the empirical regularities. We find that after controlling for the effect of cross-border investment restrictions, country funds trade at an average discount. Discounts vary substantially and contribute to a variance in country fund weekly returns which is generally three times greater than the returns on the net asset value (NAV). Regression analysis suggests that discounts have predictive power for fund returns but not for NAV returns, suggesting that investor 'sentiment' is a component of the price of a fund and not its NAV. Estimation of an unobserved components model on the discounts of the funds reveals a significant and strongly persistent common component across fund discounts. Regressions of fund and NAV returns on financial variables reveal that fund prices are 'sticky' with respect to movements in the host country's stock market and overly sensitive to variation in the U.S. and world stock markets. This relation is unaffected when we consider separately funds whose host countries restrict cross-border investment and funds which invest in emerging stock markets.

Suggested Citation

Hardouvelis, Gikas A. and La Porta, Rafael and Wizman, Thierry A., What Moves the Discount on Country Equity Funds? (December 1993). NBER Working Paper No. w4571, Available at SSRN: https://ssrn.com/abstract=232057

Gikas A. Hardouvelis (Contact Author)

University of Piraeus ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rafael La Porta

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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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