Deviations from fundamental value and future closed-end country fund returns
Keywords:
Closed-end fund, Discount, Premium, Puzzle, Vector autoregressive modelsAbstract
Purpose. This article examines whether deviations from fundamental value or closed-end country fund's discounts or premiums forecast future share price returns or net asset returns.
Design/methodology/approach. The main empirical (econometric) tool is a vector autoregressive (VAR) model. The authors model share price returns and net asset returns as a function of their lagged values, the discounts or premiums, and a control variable for local market returns. The authors also conduct Dickey Fuller and Granger causality tests as well as impulse response functions.
Findings. It was found that deviations from fundamental value do predict share price returns. This predictability is contrary to weak-form market efficiency. Premiums or discounts predict net asset returns but weakly.
Originality/value. The findings point to the idea that the closed-end fund market is somewhat predictable and inefficient (in its weak form) since the market appears to be able to anticipate a fund's future returns using information contained in the premiums (or discounts). In particular, the market has the ability to anticipate future behaviour because growing premiums forecast declining share price returns for one or two periods ahead.
Downloads
References
Akaike, H. (1974), “A new look at the statistical model identification”, IEEE Transactions on Automatic Control, Vol. 19 No. 6, pp. 716-723, doi: 10.1109/TAC.1974.1100705.
Alexander, G.J. and Peterson, M.A. (2017), “Short selling and the pricing of closed-end funds”, Journal of Financial Markets, Vol. 33, pp. 124-142, doi: 10.1016/j.finmar.2016.08.001.
Arias, E. and Torres, C. (2004), Modelos VAR y VECM para el pronóstico de corto plazo de las importaciones de Costa Rica, Banco Central de Costa Rica, Documento de Investigación, San Jose, DIE-01-2004-DI.
Davies, R., Fletcher, M. and Marshall, A. (2013), “Investigating the role of illiquidity in explaining the UK closed-end country fund discount”, International Review of Financial Analysis, Vol. 30, pp. 121-130, doi: 10.1016/j.irfa.2013.07.014.
Davies, R., Fletcher, M. and Marshall, A. (2017), “Time-varying investment barriers and closed-end country fund pricing”, Finance Research Letters, Vol. 21, pp. 66-71, doi: 10.1016/j.frl.2017.01.004.
Enders, W. (2014), Applied Econometric Time Series, John Wiley & Sons, Hoboken, New Jersey.
Fama, E.F. (1970), “Efficient capital markets: a review of theory and empirical work”, The Journal of Finance, Vol. 25, pp. 383-417, doi: 10.2307/2325486.
Fletcher, J. (2018), “An empirical examination of the diversification benefits of U.K. international equity closed-end funds”, International Review of Financial Analysis, Vol. 55, pp. 23-34, doi: 10.1016/j.irfa.2017.10.010.
Frankel, J.A. and Schmukler, S.L. (2000), “Country funds and asymmetric information”, International Journal of Finance and Economics, Vol. 5 No. 3, pp. 177-195, doi: 10.1002/1099-1158(200007).
Jones, S.K. and Stroup, M.D. (2010), “Closed-end country fund premiums and economic freedom”, Applied Financial Economics, Vol. 20 No. 21, pp. 1639-1649, doi: 10.1080/09603107.2010.524615.
Kim, J.-C. and Song, K. (2010), “Investment barriers and premiums on closed-end country funds”, International Review of Economics and Finance, Vol. 19 No. 4, pp. 615-626, doi: 10.1016/j.iref.2010.02.001.
Lee, C., Shleifer, A. and Thaler, R. (1990), “Anomalies: closed-end mutual funds”, Journal of Economic Perspectives, Vol. 4 No. 4, pp. 153-164, available at: https://www.jstor.org/stable/1942727.
Lee, C., Shleifer, A. and Thaler, R. (1991), “Investor sentiment and the closed-end fund puzzle”, The Journal of Finance, Vol. 46 No. 1, pp. 75-109, doi: 10.1111/j.1540-6261.1991.tb03746.x.
Levy-Yeyati, E. and Ubide, Á. (2000), “Crises, contagion, and the closed-end country fund puzzle”, IMF Staff Papers, Vol. 47 No. 1, pp. 54-89.
Mroua, M. and Trabelsi, L. (2020), “Causality and dynamic relationships between exchange rate and stock market indices in BRICS countries Panel/GMM and ARDL analyses”, Journal of Economics, Finance and Administrative Science, Vol. 25 No. 50, pp. 395-412, doi: 10.1108/JEFAS-04-2019-0054.
Pradhan, R., Arvin, M., Norman, N. and Bahmani, S. (2020), “The dynamics of bondmarket development, stockmarket development and economic growth: evidence from the G-20 countries”, Journal of Economics, Finance and Administrative Science, Vol. 25 No. 49, pp. 119-147, doi: 10.1108/JEFAS-09-2018-0087.
Roenfeldt, R.L. and Tuttle, D.L. (1973), “An examination of the discounts and premiums of closed-end investment companies”, Journal of Business Research, Vol. 1 No. 2, pp. 129-140, doi: 10.1016/S0148-2963(73)80003-7.
Swaminathan, B. (1996), “Time-varying expected small firm returns and closed-end fund discounts”, The Review of Financial Studies, Vol. 9 No. 3, pp. 845-887, doi: 10.1093/rfs/9.3.845.
Thaler, R.H. (2016), “Behavioral economics: past, present, and future”, The American Economic Review, Vol. 106 No. 7, pp. 1577-1600, doi: 10.1257/aer.106.7.1577.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2021 Journal of Economics, Finance and Administrative Science
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
