Risk Premia and Closed–End Country Fund Returns

Abstract

A large amount of research has focused on various explanations concerning the enigmatic behavior of closed–end fund discounts and premiums. Past research has also shown the relation between changes in implied volatilities, a surrogate for changes in risk premia, and changes in a firm's value. The objective of this study is to determine whether increases in implied volatilities on national stock indices affect the prices, net asset values (NAVs), and premiums of closed–end country funds (CECFs) and investment trusts (ITs). Implied volatilities on national stock indices refer to implied volatilities on indices representative of both, the market where the funds trade (New York—if it is a CECF and London—if it is an IT), and the market where the prices of the securities that compose the fund (i.e. the NAV) are determined (e.g. Paris—if we are referring to a French fund).