What Drives Closed-End Fund Discounts? Evidence from COVID-19

Abstract

I show that closed-end fund (CEF) discounts increased after the COVID-19 outbreak and examine potential channels using difference-in-differences (DiD) analysis. CEFs with higher retail ownership had a larger discount increase after COVID-19, suggesting the causal effect of individual investor sentiment on CEF discounts. This effect is stronger for CEFs more likely to be held by non-Republican investors, who became more pessimistic than Republican investors after COVID-19. The DiD results seem not driven by rational channels or income-driven fire sales. The findings shed light on the CEF discount puzzle and illustrate the effect of partisanship on asset prices through investor sentiment.

Keywords: Closed-End Funds, COVID-19, Mispricing, Sentiment, Partisanship

JEL Classification: G12, G14, G40