The Closed–End Fund Puzzle

Abstract

Academic research has focused specifically on the enigmatic behavior of their discounts, known in the literature as the closed-end discount puzzle. The extant evidence suggests that closed-end funds are issued at a premia with respect to their net asset value, that discounts fluctuate widely over time and also across funds, and that closed-end fund prices converge to their net asset values when they are either liquidated or open-ended. Some of the theories that have been advanced attempting to explain the puzzle are efficient market based explanations and the Investor Sentiment Hypothesis. None of the theories, either individually or collectively, provide a sufficient explanation for the pricing of closed-end funds and, therefore, the enigma continues.