Noise Trading Theory Of China Based Closed-end Fund Discount Studied

The trading prices of closed-end fund shares tend to deviate from its net asset value, it is less than the net asset value in most of the period. This phenomenon was found in the study of the U. S. financial markets, it was known as closed-end fund puzzle. The closed-end fund discount is one of the financial puzzles. For decades, experts had tried to explain the puzzle from different aspects, The reason for the closed-end fund discount has different opinions,but till now there is no explanation being accepted universally. Since the first closed-end funds being listed, the puzzle of closed-end funds discount also appeared in China, and its amplitude and fluctuation even over the foreign average level. Domestic scholars try to give interpretations from China’s special economic condition, but they also can’t explain the puzzle well.This paper summarizes the theory and existing closed-end fund discount on the basis of research results, we try to using the noise trading theory to explain the puzzle of discount of closed-end fund. Firstly, in our theoretical model, the investors are divided into two groups, the rational ones and the noise ones. The rational group requires more rewards from their portfolio because the noise ones bring additional risks to them through their reasonless investment. Using weekly amplitude as the noise trading substitution indexes, we examine if the noise trading relations with the discount of closed-end funds. The results hold out that they have a minus relationship. Secondly, we give some possible reasons for the discount of closed-end fund. On this basis, we try to structure an early warning mechanism for funds market in China. Including proposals to improve the regulatory fund, the fund management company proposals to improve governance and the right sort of investor’s investment philosophy recommendations.