The Empirical Study of the Mean Reversion of Chinese Closed-end Fund Discounts

摘要

This paper proves that Chinese closed-end fund(CEF) discounts are mean-reverting by employing Engle-Granger and Johansen tests for co-integration. The trading price increase or the net asset value(NAV) decrease would narrow CEF discounts. However, fund investors achieve excess returns by investing in CEFs at deep discounts only if the narrowing of the discount is caused by the trading price increase. Error-correction model confirms that most Chinese CEFs exhibit statistically significant coefficients on error-correction terms of both trading price and NAV. That implies that the movement of the price and NAV both would change the discount, but the discount changes are primarily due to the movement of the trading price. The empirical study of this paper shows that fund investors would achieve excess returns by investing in CEFs at discounts in China.