Costly Arbitrage: Evidence from Closed-End Funds


Posted: 10 Oct 1996

See all articles by Jeffrey Pontiff

Jeffrey Pontiff

Boston College - Department of Finance


Arbitrage costs lead to large deviations of prices from fundamentals. Using a sample of closed-end funds, I find that the market value of a fund is more likely to deviate from the value of its assets 1) for funds with portfolios that are difficult to replicate, 2) for funds that pay out smaller dividends, 3) for funds with lower market values, and 4) when interest rates are high. These factors are related to the magnitude of the deviation, as opposed to the direction (i.e., whether discount or premium), and explain a quarter of cross-sectional mispricing variation. These findings are consistent with noise trader models of asset pricing.

JEL Classification: G12

Suggested Citation

Pontiff, Jeffrey, Costly Arbitrage: Evidence from Closed-End Funds. QUARTERLY J. OF ECONOMICS. Available at SSRN:

Jeffrey Pontiff (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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