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EXPLOITING CLOSED‐END FUND DISCOUNTS: A SYSTEMATIC EXAMINATION OF ALPHAS
Author(s) -
Patro Dilip,
Piccotti Louis R.,
Wu Yangru
Publication year - 2017
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12122
Subject(s) - portfolio , value (mathematics) , closed end fund , economics , expected return , rate of return on a portfolio , econometrics , business , financial economics , monetary economics , actuarial science , modern portfolio theory , mathematics , statistics , market liquidity
Abstract We systematically study the value of the information contained in closed‐end fund (CEF) premiums. We parametrically estimate CEF expected returns as a function of the history of CEF premiums, in addition to the current premium, and buy the quintile of funds with the highest expected returns and sell the quintile of funds with the lowest expected returns. The return on this portfolio suggests that previous studies, which examine the information in current premiums only, have understated the value of the information in premiums. Our strategy values the information in the history of CEF premiums at an annualized return of 18.2%.