Closed-End Fund Discounts with Informed Ownership Differential

Posted: 23 May 2001

See all articles by Gustavo Grullon

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

F. Albert Wang

University of Dayton - School of Business Administration - Department of Economics and Finance

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Abstract

We develop a multi-asset trading model to examine the closed-end fund discount. The model shows that the discount can arise if the quality of private information in the underlying assets is sufficiently better than in the fund. The model also indicates that a discount (premium) can arise if the excessive volatility of the fund dominates (is dominated by) the fund's diversification benefit. Moreover, the model predicts a negative relation between the discount and the institutional ownership differential, as arbitrageurs prefer funds with large discounts. Using a sample of US equity closed-end funds, we test these predictions and find supporting evidence.

Keywords: Closed-end fund discount, asymmetric information, informed ownership, anomaly, asset pricing

JEL Classification: D82, G10, G12, G14

Suggested Citation

Grullon, Gustavo and Wang, Fukuo Albert, Closed-End Fund Discounts with Informed Ownership Differential. Available at SSRN: https://ssrn.com/abstract=264462

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
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HOME PAGE: http://www.ruf.rice.edu/~grullon/

Fukuo Albert Wang (Contact Author)

University of Dayton - School of Business Administration - Department of Economics and Finance ( email )

300 College Park
Dayton, OH 45469
United States
937-229-3095 (Phone)

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