The information content of closed-end country fund discounts

This paper examines whether premiums and discounts on closed-end country mutual funds (CECFs) contain useful information about future returns. We find that higher CECF premiums are associated both with higher future returns on the relevant foreign market index and with higher future NAV returns after controlling for the foreign market return. CECFs trading at large discounts are not necessarily bargains, because their future NAV performance can be expected to be relatively poor.     

ETF Premiums and Liquidity Segmentation

Exchange traded funds (ETFs) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to net asset value (NAV) as well as the life‐cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESDs) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.     

Mean-Reversion in REITs Discount to NAV &; Risk Premium

REITs discount to NAV is a puzzling regularity. The sharp increase in volatility of REITs prices over the past few years has spurred a relatively new concern amongst academics, managers and investors about the consequences of, and causes of, property risk premium on discount to NAV. The two interrelated questions arising from the recent increase in volatility of REITs prices are: Is the increased volatility responsible for the observed widening in discount to NAV? What does the observed private and public risk premium tell us about discount to NAV? We attempt to address these questions by analysing risk premiums in private and public real estate markets. The analysis is conducted in the most recent years of high stock price volatility. Our analysis reveals two major results: a tendency for discount to NAV to revert to the long term mean value of 20% and, more significantly, a lower risk premium in equivalent yields in private market than in public market. These results suggest that investors in public market have a different conception of property risk and complexity of lease options than what is conveyed by private property valuation.     

On the premiums of iShares

We show that the newly developed exchange-traded world equity index funds, or iShares, trade at economically significant premiums for 10–50% of the times even after controlling for transaction costs and time-zone measurement errors. Moreover, iShares price returns exhibit excessive volatility relative to their NAV returns. These findings suggest a limit of arbitrage in the international iShares market where iShares can be created and redeemed at will and premiums that exceed the creation/redemption transaction costs should be immediately arbitraged away. However, our cointegration and persistence profile analyses indicate that the deviations of most iShares' prices from their NAVs are not persistent and converge to zero within two days. We propose several rational factors to explain the absolute value of iShares premiums. The panel regression results suggest that institutional ownership, bid–ask spread, trading volume, exchange rate volatility, political and financial crises and, to a lesser extent, the conditional correlation between the U.S. and home markets are the significant driving factors of the size of iShares premiums. However, a significant variation of the premiums still remains unexplained, which suggests that behavioral factors may account for some mispricing.     

Why do closed-end country funds trade at enormous premiums during currency crises?

We investigate the response of US traded country fund premiums to currency crises in related foreign (local) markets. Our analysis includes 25 currency crises over the past decade involving 18 funds investing in 12 emerging markets, and 7 funds investing in 6 developed markets. We find that fund premiums and the volatility of the premiums increase dramatically in response to a currency crisis, both for emerging and developed markets funds, and that these effects dissipate slowly over time. Our results show that country fund shares and net asset values (NAVs) have differential risk exposures and that these differences are exacerbated during a crisis. While the NAV returns show sensitivity to changes in the local market index, share returns are sensitive to changes in both local and world market indices. Therefore, in response to a currency crisis, when local stock markets decrease in value, fund NAVs react more strongly than their share prices which have a strong global component. We also show that the high premiums observed during currency crises are not due to the reluctance of investors to trade and realize losses.     

The pricing and performance of leveraged exchange-traded funds

Leveraged ETFs are a recent and very successful financial innovation. They provide daily returns that are in a multiple or a negative multiple of the daily returns on a market benchmark. In this paper, we examine the characteristics, trading statistics, pricing efficiency and tracking errors of a sample of leveraged ETFs. We find that these ETFs are traded mainly by retail traders with very short holding periods. Price deviations (from NAV) are small on average, but large premiums and discounts are prone to occur. More interestingly, the behavior of premiums is different between bull (i.e., those with a positive multiple) and bear ETFs (i.e., those with a negative multiple). Our findings are consistent with the argument that the end-of-day rebalancing of the funds’ exposures increases market volatility at the close of a trading day. As for tracking errors, they are small for holding periods of up to a week, but become increasingly larger for longer horizons.     

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.     

How Informative Is Floating NAV When Securities Trade Infrequently?

We examine if a floating net asset value (NAV) increases the transparency of risk for investors. Using closed‐income fixed income funds we find little evidence that a floating NAV helps investors better understand the value and risk of a fund when a fund's assets trade infrequently. This potentially informs the debate regarding the adoption of a floating NAV in the money market industry. Our results suggest that it is unlikely that the benefits of floating NAV will outweigh the costs.     

Overreaction diamonds: precursors and aftershocks for significant price changes

Overreactions and other behavioral effects in stock prices can best be examined by adjusting for the changes in fundamentals. We perform this by subtracting the relative price changes in the net asset value (NAV) from that of market price (MP) daily for 134 406 data points of closed-end funds trading in US markets. We examine the days before and after a significant rise or fall in price deviation and MP return and find evidence of overreaction in the days after the change. Prior to a spike in deviation we find a gradual two- or three-day decline (and analogously in the other direction). Overall, there is a characteristic diamond pattern, revealing a symmetry in deviations before and after the significant change. Much of the statistical significance and the patterns disappear when the subtraction of NAV return is eliminated, suggesting that the frequent changes in fundamentals mask behavioral effects. A second study subdivides the data depending on whether the NAV or market price is responsible for the spike in the relative difference. In a majority of spikes, it is the change in market price rather than NAV that is dominant. Among those spikes for which there is little or no change in NAV, the results are similar to the overall study. Furthermore, the upward spikes are preceded by one or two days of declining market price while NAV rises slightly or is relatively unchanged. This suggests that a cause of the spike may be due to over-positioning of traders in the opposite direction in anticipation.     

Institutional Portfolio Flows and International Investments

Using a new technique, and weekly data for 25 countries from1994 to 1998, we analyze the relationship between institutionalcross-border portfolio flows, and domestic and foreign equityreturns. In emerging markets, institutional flows forecast statisticallyindistinguishable movements in country closed-end fund NAV returnsand price returns. In contrast, closed-end fund flows forecastprice returns, but not NAV returns. Furthermore, institutionalflows display trend-following (trend-reversing) behavior inresponse to symmetric (asymmetric) movements in NAV and pricereturns. The results suggest that institutional cross-borderflows are linked to fundamentals, while closed-end fund flowsare a source of price pressure in the short run.     

The Discount to NAV of Distressed Open-End Real Estate Funds

The Journal of Real Estate Finance and Economics - This paper examines the discount to NAV in the context of distressed German open-end real estate funds. This is a unique setting to study NAV...     

开放式基金的净值增长能力与证券市场收益的互动关系检验

随着证券投资基金规模的不断增大,基金已经成为我国证券市场上的重要机构投资者,其对证券市场的影响也日益深入。考察股票型开放式基金的净值增长能力及其与证券市场指数收益的互动关系,得出如下结论:(1)我国开放式基金的净值增长率高于市场收益;(2)在一个较长时期内,市场收益的变动是开放式基金净值增长率变动的格兰杰原因,但反过来并不成立;(3)开放式基金的净值增长能力和市场收益之间存在着一种长期的协整关系。     

Property Company Stock Price and Net Asset Value: A Mean Reversion Perspective

This study investigates the relationship between property company stock prices (P) and their net asset values (NAV) from a mean reversion perspective. In contrast to U.K. evidence, we find that there is absence of a long-term stable relationship between the two series. However, the variance ratio tests and multi-period regressions suggest that both P and NAV series have exhibited transitory components. In addition, there is some evidence of mean reversion behavior of Singapore property stock prices toward the property companies' NAVs over the past 15 years from 1985 to 1999, both at individual company level and in the sector as a whole. The results also reveal that NAV, as a traditional proxy to fundamental value, is significant in capturing the dynamics of the changes in property stock prices. Hence NAV is relevant in property company valuation. However the extent of mean reversion between the property stock prices and NAVs is slow and deviations between the two markets' valuation could therefore be prolonged.     

股票停牌、涨跌停与ETF定价效率——基于上证50ETF日度数据的实证研究

本文应用中国股市2007年至2011年的数据,研究了上证50ETF市场价格和基金净值的相关关系,以及折溢价水平及其影响因素。基于ETF的申购赎回和交易机制,在成分股涨跌停板和停牌期间,由于ETF二级市场价格具有价格发现功能,ETF市场价格可能较大偏离(形式上的)ETF净值,造成ETF的异常折溢价,而此类异常折溢价并不是真正的套利机会。另外,上证50ETF的市场价格与基金净值存在显著同步变动的关系;在涨跌停板和停牌期间之外,上证50ETF的折溢价水平低于套利所需的交易成本。本文研究表明,上证50ETF具有较高的定价效率。     

Why Does Performance Persistence Vary Among Closed-End Funds?

This study extends the research on closed-end fund performance persistence by investigating whether the persistence of both net asset value (NAV) and market price returns of U.S. registered closed-end funds is related to various fund characteristics. The sample consists of 505 closed-end funds, which are investigated over the period from January 1976 to December 1996. The analysis tests whether persistence is related to the fund characteristics size, goal, management fees, turnover, fund family membership, fund experience, and the exchange on which a fund is traded. The results vary across holding periods used to calculate persistence but are similar with respect to the NAV and market price returns. Funds with lower expense ratios and funds traded on the NYSE show more persistence of strong NAV and market price performance.     

Pricing of national index funds

This article investigates the pricing behavior of national index funds (NIFs). Under barriers to capital flows in an otherwise perfect capital market, the familiar result of zero premium/discount obtains. The more realistic assumption of imperfect cross-border arbitrage suggests that in a two country setting the NIFs will sell at a premium. In a multicountry framework, the investment barriers will result in NIFs generally trading at a premium, although theoretically one cannot rule out a discount from net asset value (NAV). A simple test supports the proposition that under investment barriers, NIFs should trade at a premium to NAV after controlling for the average domestic closed-end fund discount.     

An analysis of nonlinearities in term premiums and forward rates

Previous studies often assume a linear relation between term premiums on Treasury securities and forward interest rates even though a nonlinear relation is a theoretical and an empirical possibility. To examine the relation, this paper uses a nonparametric kernel approach that permits both linear and nonlinear associations. The linear specification yields conditional expectations of term premiums that are similar to those predicted by the kernel approach only at the mean forward premiums. Generally, kernel estimation shows that the responses of expected term premiums to changes in forward premiums are time-varying and are significantly different from the constant slope coefficients produced by linear estimations. The evidence also shows that forward premiums contain much more information content for predicting future term premiums that has been found with linear estimation procedures.     

A contingent claim analysis of closed-end fund premia

We estimate contingent claims that replicate monthly net asset value (NAV) payoffs from closed-end funds. A claim's theoretical value is obtained by martingale pricing methods. The resulting net present value (NPVS) sequence is the theoretical premia sequence that is compared to the actual market premia sequence. The theoretical premia, like actual premia, are uncorrelated with NAV returns and are positively autocorrelated due to autocorrelation in the pricing information. However, there is poor correspondence between the theoretical and actual premia that seems due to the market's systematic errors in estimating a fund's management value. Risky arbitrage may be available to insiders.     

On the Perils of Financial Intermediaries Setting Security Prices: The Mutual Fund Wild Card Option

Economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals. We demonstrate the problem in a specific context, the exchange of open-end mutual fund shares. Mutual funds typically set fund share price (NAV) using an algorithm that fails to account for nonsynchronous trading in the fund's underlying securities. This results in predictable changes in NAV, which lead to exploitable trading opportunities. A modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability. However, there are many other potential sources of distortion when intermediaries set prices.     

From T-Bills to Stocks: Seasonal Anomalies Revisited

This paper employed eleven data series which consist of stocks, bonds, bills, equity premiums, term premiums, and various default premiums to investigate whether January seasonality reported in existing literature is robust across different states of the economy as this has important trading implications. For the periods 1926–1990, small stocks, small stock premiums, low grade bonds, and default premiums (spread between high grade, low grade and government bonds) reveal January seasonality and that the seasonality is robust across different states of the economy except for low grade bond returns and default premiums. January seasonality for low grade bond returns and low grade bond default premiums are primarily driven by results found during periods of economic expansion. Overall, January seasonality is more evident during the economic expansion periods although the magnitude of default premiums is larger during periods of economic contraction. Furthermore, prior findings of strong summer equity returns are primarily driven by the results found during the periods of economic contraction. It is also found that equity returns are generally higher during periods of economic expansion.