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A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory
Author(s) -
Jarrow Robert,
Protter Philip
Publication year - 2019
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12207
Subject(s) - capital asset pricing model , economics , rational expectations , consumption based capital asset pricing model , arbitrage pricing theory , rational pricing , asset (computer security) , martingale (probability theory) , investment theory , financial economics , martingale pricing , econometrics , microeconomics , local martingale , computer science , mathematics , statistics , computer security
This paper provides a new explanation for closed‐end fund (CEF) discounts and premiums using the local martingale theory of asset price bubbles. This is a rational asset pricing model that is shown to be consistent with the existing empirical evidence on CEF discounts/premiums. Additional testable implications of the model are derived, which await subsequent research for their resolution. This bubble theory also applies equally well to understanding discounts and premiums on exchange traded funds.