61 Pages Posted: 25 Nov 2015 Last revised: 28 Aug 2016
Date Written: August 25, 2016
Recent work suggests that investor sentiment drives the behavior of closed-end fund premiums. We develop a microstructure model that links the observed closed-end fund premiums to the interplay between the bid-ask spread of the fund with that of the fund's holdings. Employing a battery of investor sentiment measures, we find inconsistent evidence in support of an investor sentiment hypothesis, but robust support for the liquidity based explanation in explaining the closed-end fund premium. The importance of the microstructure explanation extends to pricing of the closed-end funds whereby significant cross-sectional pricing ability for the bid-ask spreads is found, but no significant pricing ability for either investor sentiment or closed-end fund premiums.
Keywords: Closed-end funds, Bid-Ask Spread, Investor Sentiment
JEL Classification: J31
Suggested Citation: Suggested Citation