Authors: Gikas A. Hardouvelis, Rafael La Porta, Thieny A. Wizinan
Publication: The Natioanl Bureau of Economic Research, NBER Working Paper No. 4571, December 1993
The paper characterizes several empirical regularities of closed-end fund prices and examines the extent to which a sentiment” model of asset prices is consistent with the empirical regularities. We find that after controlling for the effect of cross-border investment restrictions, country funds trade at an average discount Discounts vary substantially and contribute to a
variance in country fund weekly returns which is generally three times greater than the returns on the net asset value (NAy). Regression analysis suggests that discounts have predictive power
for fund returns but not for NAV returns, suggesting that investor “sentiment” is a component of the price of a fund and not its NAy. Estimation of an unobserved components model on the
discounts of the funds reveals a significant and strongly persistent common component across fund discounts. Regressions of fund and NAV returns on financial variables reveal that fund
prices are ‘sticky” with respect to movements in the host country’s stock market and overly sensitive to variation in the U.S. and world stock markets. This relation is unaffected when we
consider separately funds whose host countries restrict cross-border investment and funds which invest in emerging stock markets.