Closed End Fund Discounts And Premiums PDF Download

Closed-end funds (CEF) are a unique family of mutual funds because they trade at a price that is different than the value of the assets in their portfolios. The deviation of the price of a CEF from the value of its underlying assets is seen as a discount when the price is less than the value and a premium when it is greater. The discrepancy between price and underlying value is perplexing. Why would a seller of fund shares accept less than the value of the assets? Why would a buyer pay more for a share than its assets are worth? These questions are known as the CEF puzzle. This study built multiple regression models using publicly available measures of CEF characteristics to predict premium/discount (PD). Further, these models were used to uncover fund-level factors driving levels of PD. A multiple regression model using 34 measures was generated that predicted a full 87% of the variance PD. Because of the high collinearity and even overlap of the measures used in this model, no statement could be made about the nature of predictors influencing PD. A model using 9 principal components extracted from continuous measures and 4 categorical measures predicted 59% of the variance in PD and yielded a view of factors driving PD. Using PCA components, it was found that whether a fund was sponsored by Pacific Investment Management Company, LLC (PIMCO) was the dominant factor in the level of PD as almost all PIMCO CEFs trade at a premium. Controlling for PIMCO, annualized rate of return followed by distribution rate, past performance measures, prevailed. PD was found to be very strongly determined by past performance.