Costly Arbitrage and the Closed-End Fund Puzzle: Evidence from a Natural Experiment

39 Pages Posted: 23 Jun 2015 Last revised: 11 May 2016

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Liang Ma

University of South Carolina - Darla Moore School of Business

Date Written: May 10, 2016

Abstract

We examine how short sale constraints on portfolio holdings affect closed-end fund (CEF) discounts and thereby distinguish behavioral-based explanations from fundamental-based explanations of the discounts. Using Regulation SHO as a natural experiment that relaxes short-sale constraints on pilot stocks, we find that discounts of CEFs holding more pilot stocks decrease relative to CEFs holding fewer pilot stocks. We also find that the effect comes only from CEFs that trade at discounts. The results suggest that a substantial part of CEF discounts is driven by mispricing.

Keywords: Costly Arbitrage, Mispricing, Closed-End Fund Puzzle, Short Sale Constraints, Regulation SHO

JEL Classification: G12, G18

Suggested Citation

Chu, Yongqiang and Ma, Liang, Costly Arbitrage and the Closed-End Fund Puzzle: Evidence from a Natural Experiment (May 10, 2016). Available at SSRN: https://ssrn.com/abstract=2621898 or http://dx.doi.org/10.2139/ssrn.2621898

Yongqiang Chu (Contact Author)

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Liang Ma

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
803-777-6366 (Phone)

HOME PAGE: http://sites.google.com/site/liangmaweb/

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