A Rational Basis for Closed–End Fund Discounts

Abstract

Baigent [1999] suggests that the discounts on closed–end fund shares might be the result of the Bayesian learning process of less informed investors, so that the discounts are rational. Empirical tests show that the prices of closed–end fund shares can be explained by lagged fund share value, the NAV, and trading volume, similar to a Bayesian process. Results also show that the volatility of closed–end fund shares is lower than for the underlying portfolio so that the noise trader risk argument is challenged.