Closed–End Fund Discounts

Abstract

The discounts on closed–end mutual funds may be partially attributed to Bayesian learning in a noisy rational expectations equilibrium. When the individual error is removed from private signals of informed agents, and random supply noise is absent, price is equated to its net asset (intrinsic) value; however, in the presence of imperfect information for “small investors,” price is biased downward. This model presents an alternative “rational” explanation for the existence of the closed–end fund discount.