Excess Volatility and UK Investment Trusts

31 Pages Posted: 27 May 2002

See all articles by Sam Agyei-Ampomah

Sam Agyei-Ampomah

Cranfield University - School of Management

John Richard (Dick) Davies

University of Strathclyde - Department of Accounting and Finance

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The possible tendency of stock prices to fluctuate excessively has figured prominently in the debate on market efficiency. Recent research in the USA indicates that the volatility in closed end fund returns is far greater than that of the fund's underlying portfolio. UK investment trusts are the equivalents of closed end funds in the US, however there are a number of institutional differences between them. The purpose of this study is to extend this research by investigating for the UK market the issues examined by Pontiff (1997). Given the sample of trusts studied, it was also possible to develop the analysis in more detail. Our main findings can be summarised as follows: (1) there is evidence of excess return volatility in UK investment trusts similar to that observed in US closed end funds; (2) the excess volatility in fund returns is consistent across different fund classifications and characteristics; (3) Pontiff's (1997) observation that closed end fund returns underreact to returns on the underlying portfolio cannot be supported in our study. The findings provide evidence suggestive of irrational market behaviour. New findings not previously documented for the US market include evidence that the excess volatility is consistent substantially across different asset categories, especially foreign asset categories. Investor sentiment is frequently cited as an explanation for the anomalous behaviour of US closed end funds, since a high proportion of closed end stocks are held by private investors. As similar behaviour is observed in the UK investment trusts, despite a high proportion of institutional clientele, the role of investor sentiment can be questioned.

Keywords: Excess Volatility, Variance Bound Tests, Mutual Funds, Investment Trusts, Net Asset Value

Suggested Citation

Agyei-Ampomah, Sam and Davies, John Richard (Dick), Excess Volatility and UK Investment Trusts. Available at SSRN: https://ssrn.com/abstract=313923 or http://dx.doi.org/10.2139/ssrn.313923

Sam Agyei-Ampomah (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom
+441234754375 (Phone)

HOME PAGE: http://www.som.cranfield.ac.uk/som/p19638/People/Faculty/Academic-Faculty-Listing-A-Z/Dr-Sam-Agyei-A

John Richard (Dick) Davies

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom

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