The Behaviour of Discounts on Closed-End Mutual Funds in the UK and US

Abstract

We compare and contrast the behaviour of discounts of closed-end equity funds listed in the UK and the US. For most funds, regardless of country, prices and NAVs are cointegrated and prices adjust towards NAVs rather than NAVs towards prices. Discounts are smaller in the US than in the UK, but are also much more volatile and subject to upward spikes. Consistent with arbitrage, those UK and US funds with larger transactions costs have more volatile discounts. Threshold autoregressions show that reversion to the mean is faster from below in the UK, but faster from above in the US. This difference between funds in the two countries can be reconciled if the rate of reversion for an individual fund's discount depends less on its distance from the mean than on its distance from zero. The results are consistent with the 'mainstream' character of UK funds, where there is significant institutional participation, and the 'exotic' character of US funds, where retail investors seek assets that are not correlated with their existing portfolios.

Keywords: closed-end fund discount, mean reversion, arbitrage

JEL Classification: G12, G23