Study Of Closed-end Fund Discounts Based On Investor Sentiment

The discount of closed-end fund refer to the phenomena that the funds often be sold at a price under the net asset value (NAV) of their underlying portfolio, witch can be found on both mature and emerging markets. This phenomena disobeys the efficient market hypothesis, and is a puzzle in the field of finance.First, this paper reviews the literature on discount of closed-end fund in the world, then analyses the history and statistic characteristics of the discount in China. After that, this paper empirically studies the discount of all the closed-end funds in China bases on the investor sentiment theory.Second, this paper consults the investor sentiment theory from LST(1991) and HLW(1994), then gets four propositions base on a general equilibrium model. Then this paper documents that it's the sentiment of noise traders witch drives the discount of closed-end funds, this conclusion comes from the empirical results of four propositions: (l)the discount of all funds have highly positive correlation, as well as their change; (2) the discount contain information about the future price, but not the future NAV; (3) the mean-reversion character of discount; (4)the variance of price return of funds is higher than the NAV return.Third, based on the framework of liquidity-investor sentiment model of Baker and Stein (2004), this paper brings forward a model about the relation between the discount and the turnover of the funds, witch denotes the liquidity. The empirical results from both cross-sectional data and panel data significantly support the hypothesis: the liquidity of a fund can be the indicator of investor sentiment.Last, this paper studies the relation between other factors of the fund, such as fund size, market return, market index, the percentage of institutional investor, etc. The result from cross-sectional data indicates the fund size has positive correlation with the discount, and the result from panel data indicates that the percentage of institutional investor has negative correlation with the discount. The results also indicate other factors have no significant correlation with the discount.