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Exploiting Closed-End Fund Discounts: A Systematic Examination of Alphas

50 Pages Posted: 19 Jul 2014 Last revised: 16 Jun 2017

Dilip K. Patro

OCC

Louis R. Piccotti

SUNY at Albany - School of Business

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: December 7, 2016

Abstract

We systematically study the value of the information contained in closed-end fund (CEF) premiums. We parametrically estimate CEF expected returns as a function of the history of CEF premiums, in addition to the current premium, and buy the quintile of funds with the highest expected returns and sell the quintile of funds with the lowest expected returns. The return on this portfolio suggests that previous studies, which examine the information in current premiums only, have understated the value of the information in premiums. Our strategy values the information in the history of CEF premiums at an annualized return of 18.2%.

Keywords: Closed-end fund puzzle, limits to arbitrage, market efficiency

JEL Classification: G01, G11, G12

Suggested Citation

Patro, Dilip K. and Piccotti, Louis R. and Wu, Yangru, Exploiting Closed-End Fund Discounts: A Systematic Examination of Alphas (December 7, 2016). Patro, Dilip, Piccotti, Louis R. and Wu, Yangru. (2017). Exploiting Closed-End Fund Discounts: A Systematic Examination of Alphas, Journal of Financial Research 40, 223-248. Available at SSRN: https://ssrn.com/abstract=2468061 or http://dx.doi.org/10.2139/ssrn.2468061

Dilip Patro

OCC ( email )

400 7th Street SW
Washington, DC 20219
United States
202-649-5548 (Phone)

Louis Piccotti (Contact Author)

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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