Identifying regime changes in closed-end fund discounts |
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Authors: | J Christopher Hughen Mark E Wohar |
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Institution: | 1. Reiman School of Finance, Daniels College of Business, University of Denver, 2101 S. University Boulevard, 80208, Denver, CO 2. Department of Economics, University of Nebraska-Omaha, RH 512K, 68182-0286, Omaha, NE
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Abstract: | In seeming contradiction of the efficient markets hypothesis, closed-end fund shares typically trade at discounts to their
portfolio values. We find that about half of these discounts are nonstationary. Focusing only on those funds that have stationary
discounts, this study applies the Bai and Perron (1998, 2003a,b) methodology to test for structural breaks in the mean discounts.
Virtually all have structural breaks, and our findings contradict previous studies that indicate closed-end fund discounts
revert to a long-term mean value. The data indicate that closed-end fund trading strategies are more risky than they superficially
appear. As structural breaks in mean discounts do not occur together, our analysis does not find support for a common factor
(possibly investor sentiment) causing these breaks. |
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