A model of the discounts on closed-end mutual funds, the quantification of investor sentiment, and the inability of arbitrage to force closed-end fund share prices to par.

摘要

Closed-end mutual funds are mutual funds whose shares trade like a stock. This is of interest because forces of supply and demand determine the price of said stock. Oddly, the prices at which closed-end funds trade normally differ from their portfolio values—which are precisely determinable because closed-end funds are required to report the contents of their portfolios weekly. The fact that closed-end fund shares are priced by the market at a value different from their portfolio value has led to a large literature that either (1) argues that pricing deviations are proof that investors are irrational and drive prices away from portfolio values; or (2) that there exist strong frictions which cause closed-end fund prices to rationally differ from portfolio values. This dissertation proceeds along both paths, first formalizing a model in which capitalized management fees explain the average deviation of prices from portfolio values, and then demonstrating that fluctuations in pricing deviations can only be explained by appealing to changes in investor sentiment about whether fund managers will be able to beat the market. This sentiment is formalized, and an empirical measure of it can be derived from actual price deviations. It is demonstrated that this measure is positively correlated with capital flows into open-end mutual funds and negatively correlated with capital flows into index funds: when investors are more confident in managers, capital flows into managed assets (open-end and closed-end funds) and out of passive assets (index funds). Thus, investor sentiment about managers beating the market appears to affect investor behavior in a wide variety of markets. It is additionally demonstrated that such sentiment is free to move closed-end fund prices because trading costs and the bid-ask spread make arbitrage opportunities unprofitable. Without such a profit motive to entice non-sentimental investors to push fund prices toward fundamental values, fund prices are determined by the trading of sentimental investors.