We model the closed-end fund discount/premium in a version of Merton’s (1978) asset
pricing model with incomplete information. In this economy, investors trade only
assets which they “know about”. The model generates a closed-end fund discount or
premium, depending on risk-aversion parameters. The fund share price reverts to the
net asset value on open-ending of the fund. The discount/premium is a result of two
economic forces: (1) the fund manager’s objective is to maximize expected utility
of her fee income rather than the welfare of fund shareholders. Mis-alignment of
objectives of the fund manager and shareholders results in discount/premium, and (2)
for given risk aversion parameters, diversification benefits to investors determine
the size of the discount/premium. Pontiff (1996) documents a positive relation
between the absolute value of discounts and unhedgeable risk. This evidence along
with other findings leads Pontiff to conclude that the absolute discounts appear to
be a result of mispricing. Our model provides an alternative interpretation on the
positive relation found by Pontiff based on the economic forces depicted above.
게시판
공지사항
[2002년 제 2차] Incomplete information and the closed-end fund disc
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게시일 :
2003-07-12
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