Excess Volatility and Closed-End Funds
AMERICAN ECONOMIC REVIEW
Posted: 26 Feb 1997
If investors are rational, the variance of closed-end mutual fund returns should equal the variance of the underlying securities in their portfolios. In fact, this paper shows that the average closed-end fund's monthly return is 64 percent more volatile than its assets. Unlike variance- bound tests, this facilitates an excess volatility test that does not rely on strong assumptions about discount rates or dividend streams. Although, largely idiosyncratic, 15 percent of the average fund's excess risk is explained by market risk, small firm risk, and risk that affects other closed-end funds.
JEL Classification: G11
Suggested Citation: Suggested Citation