Analysis Of Closed-End Fund Discount Puzzle In China

Unlike open fund, closed-end fund's price is often different with its NAV (net asset value). If the price is higher than the NAV, it is called premium, contrarily discount. The closed-end fund puzzle includes four stylized facts about the performance of closed-end fund. These are (1) New funds appear on the market at a premium; (2) Closed-end funds move rapidly to a discount after IPO; (3) Discounts are subject to wide variation, both over time and across funds; (4) When closed-end funds are terminated, either through merger, liquidation, or conversion to an open-end fund, prices converge to reported net asset value. Substantial research has been done in literature aiming at resolving the puzzle, but it seems there is no overwhelming argument or theory can fully explain the documented phenomena on closed-end fund puzzle.This paper sheds further light on the closed-end fund puzzle in China.Asymmetrical information theory does not explain the closed-end fund IPO premium, neither with the hot issue period hypothesis. Only uninformed investors purchasing hypothesis makes a good explanation.This paper indirectly proves the application of investor sentiment theory by testing four propositions induced from the investor sentiment theory presented by HLW (1994), which are (1) the discount of all funds have highly positive correlation, as well as their change; (2) the discount contains information about the future price, but not the future NAV; (3) the mean reversion of discount; (4) the variance of price returns is higher than the NAV return.Other variables such as concentration of fund asset, the proportion of institutional investor, the listed time, the market return, the market index can not provide a strong explanation to the discount.Finally, when some closed-end fund declared its plan to convert to open fund, the discount significantly reduced, and made positive extra return to the investors.