An Empirical Study On The Closed - End Fund Discount In China

The mystery of closed-end fund discount is a common phenomenon in the fund industry both in China and abroad. China’s closed-end funds suffer by the high discount, resulting in the development of closed-end funds into a bottleneck. Respectively from Efficient Market Hypothesis and the behavioral finance theory, we can find out different interpretations on the closed-end fund discount phenomenon. What are the influencing factors of China’s closed-end fund discount? How does the closed-end fund discount rate change in different environments? What is the relationship between discount rate and investment performance of a closed-end fund? Can we use fund discount phenomenon to invest efficiently on closed-end funds?To solve these problems, this paper gathers the discount data of22closed-end funds between2006and2012, to find out the main influencing factors of the discount by the empirical analysis. The article also analyzes the influence of environmental factors on the closed-end fund discount, and compares the importance of different influencing factors in the different environments.I found that the remaining duration, unit net rate of return, the cumulative net value of the closed-end funds market index could significantly explain the closed-end fund discount phenomenon. The remaining duration, unit net rate of return and the discount rate of the closed-end funds are positively correlated; the net cumulative value of closed-end funds, the market index and the fund discount rate are negatively correlated. Only from the point of view of noise traders rather than the point of view of rational expectations can we explain some of the phenomenon. In the analysis of the different environments of the Bull and Bear, we found the net rate of return had different effects on the discount rate of the closed-end funds in Bull and Bear:In a bull market, there was a negatively correlation; in a bear market, there was a positive correlation. This shows that the phenomenon of noise trading in a bear market is more significant.The phenomenon of close-end fund prices deviating from the actual values can help us to do effective investment on the highly discounted closed-end funds so as to obtain excess benefit. From three classic exponential models, this paper compares these closed-end funds’ investment performance, and does the correlation analysis with the closed-end funds’ discount rates. The result shows that the closed-end fund’s discount rate is positively related to its investment performance. On this basis, this paper constructs a set of investment strategies which based on the closed-end fund discount phenomenon. For the high discount rate reflects that the closed-end fund’s investment performance is underestimated, we can find out the undervalued funds and yield returns higher than the market level. Finally, this paper tests effectiveness of the strategies using historical data.