Closed-End Funds
60 Pages Posted: 25 Nov 2015 Last revised: 14 Dec 2020
Date Written: August 23, 2019
Abstract
We develop a liquidity premium microstructure model that links the closed-end fund (CEF) premiums to the interplay between the fund's bid-ask spread and that of its holdings. We test the liquidity premium hypothesis against a host of competing determinants that include a battery of investor sentiment measures and find robust support for the liquidity premium hypothesis, but inconsistent support for the competing explanations for the CEF premiums. A natural experiment confirms these findings. Tests of return predictability show significant pricing ability of the closed-end fund's bid-ask spreads, but no significant pricing ability for either investor sentiment or closed-end fund premiums.
Keywords: Closed-end funds, Bid-Ask Spread, Investor Sentiment
JEL Classification: J31
Suggested Citation: Suggested Citation