The Premium-Discount Puzzle of Closed-End Bond Funds: An Empirical Examination of the Dividend Yield Preference Hypothesis
25 Pages Posted: 26 Jun 2003
Date Written: January 2003
Abstract
This paper attempts to make a contribution to the understanding of the factors that determine premiums/discounts of closed-end bond funds. Much research has been conducted to explain closed-end equity fund premiums/discounts. Very little evidence, however, has been developed to explain why closed-end bond funds trade at premiums over or discounts from net asset values. In this paper, we hypothesize that short-term investors who seek a high current yield look to closed-end bond funds as a monthly income vehicle. In addition, closed-end funds allow individual investors with a short investment horizon to get in and out of the funds easily. We present evidence that there is a significant and positive relation between bond fund premiums and the dividend yield. We also examine whether closed-end bond fund premiums/discounts are related to other factors such as leverage, future investment performance, lifeboat provisions, anti-takeover provisions, and liquidity.
JEL Classification: G1, G40
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Managerial Performance and the Cross-Sectional Pricing of Closed-End Funds
By J. B. Chay and Charles Trzcinka
-
A Rational Model of the Closed-End Fund Discount
By Jonathan Berk and Richard Stanton
-
A Positive Theory of Closed-End Funds as an Investment Vehicle
-
Three Centuries of Asset Pricing
By Elroy Dimson and Massoud Mussavian
-
Sentiment, Expenses and Arbitrage in Explaining the Discount on Closed-End Funds
By Gordon Gemmill and Dylan C. Thomas
-
Do Stock Prices Really Reflect Fundamental Values? The Case of Reits
By William M. Gentry, Charles M. Jones, ...
-
Closed-End Fund Discounts and Expected Investment Performance
By Robert Ferguson and Dean Leistikow
-
Dividend Commitment and Discount Management: The Distribution Policy of Closed-End Funds
By Z. Jay Wang and Vikram K. Nanda