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21
A liquidity-based theory of closed-end funds
- Review of Financial Studies
, 2009
"... This paper develops a rational, liquidity-based model of closed-end funds (CEFs) that provides an economic motivation for the existence of this organizational form: They offer a means for investors to buy illiquid securities, without facing the potential costs associated with direct trading and with ..."
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Cited by 28 (2 self)
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This paper develops a rational, liquidity-based model of closed-end funds (CEFs) that provides an economic motivation for the existence of this organizational form: They offer a means for investors to buy illiquid securities, without facing the potential costs associated with direct trading and without the externalities imposed by an open-end fund structure. Our theory predicts the patterns observed in CEF initial public offerings (IPOs) and the observed behavior of the CEF discount, which results from a trade-off between the liquidity benefits of investing in the CEF and the fees charged by the fund’s managers. In particular, the model explains why IPOs occur in waves in certain sectors at a time, why funds are issued at a premium to net asset value (NAV), and why they later usually trade at a discount. We also conduct an empirical investigation, which, overall, provides more support for a liquidity-based model than for an alternative sentiment-based explanation. (JEL G14). A closed-end fund (CEF) is a publicly traded firm that invests in securities. While investors can, in principle, trade either in the CEF’s shares or directly in the underlying securities, a CEF rarely trades at a price equal to the value
Conditional
, 2011
"... Abstract: Closed‐end investment funds (CEIFs) have provided researchers with an important natural laboratory for the testing of theories of asset pricing and market efficiency. Because such funds are primarily portfolios of the assets of other firms but have publicly traded shares, deviations betwee ..."
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Cited by 4 (1 self)
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Abstract: Closed‐end investment funds (CEIFs) have provided researchers with an important natural laboratory for the testing of theories of asset pricing and market efficiency. Because such funds are primarily portfolios of the assets of other firms but have publicly traded shares, deviations between funds ’ share prices and their underlying net asset values (NAVs) represent a historically important anomaly requiring theoretical explanation. In this article, we suggest that caution needs to be applied in this endeavor. In particular, we provide evidence that the processes generating prices and NAVs differ among fund types, implying that explanations of mispricing will necessarily be somewhat parochial. Using an approach which does not impose a cointegrating relationship between prices and NAVs, we empirically examine discounts of both equity and bond funds, and we find an important asymmetry between them. In particular, we show a structural break in this relationship for bond funds after the Lehman bankruptcy and suggest an explanation based on persistence in NAVs arising from market illiquidity.
The Dynamics of Limits to Arbitrage: An Empirical Investigation
, 2011
"... We study empirically the dynamic properties of the limits to arbitrage in the sovereign bond market around a period of market distress. The recent credit crisis offers a unique opportunity to investigate the economic causes of limits to arbitrage. We consider markets that were liquid pre-crisis, and ..."
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We study empirically the dynamic properties of the limits to arbitrage in the sovereign bond market around a period of market distress. The recent credit crisis offers a unique opportunity to investigate the economic causes of limits to arbitrage. We consider markets that were liquid pre-crisis, and use pairs of sovereign bonds that have been issued in two foreign currencies, i.e. usd and euro. A simple theoretical arbitrage relationship links their credit spreads. While these bounds are within bid/ask spreads during the normal time, they are severely violated during periods of financial stress. As an example, in December 2008 Brazil euro-denominated credit spreads on 10-year Eurobonds were nearly 35 % higher than the same credit risk denominated in usd. We construct an empirical proxy of limits to arbitrage and run a comprehensive investigation about its economic and behavioral drivers. We find that limits to arbitrage are time-varying and state-dependent. Given that the 2008 Crisis went through two distinct phases (i.e. liquidity crunch and credit crisis), our findings suggest that while sentiment risk and subjective uncertainty affect the first phase, it is funding risk that plays a central role. After the collapse of Lehman Brothers, however, perception of tail event risk and fundamental-related macro risks drive the dynamics of the limits to arbitrage.
1 The work presented in this thesis is my own.
, 2013
"... The copyright of this thesis rests with the author and is made available under a Creative Commons Attribution Non-Commercial No Derivatives licence. Researchers are free to copy, distribute or transmit the thesis on the condition that they attribute it, that they do not use it for commercial purpose ..."
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The copyright of this thesis rests with the author and is made available under a Creative Commons Attribution Non-Commercial No Derivatives licence. Researchers are free to copy, distribute or transmit the thesis on the condition that they attribute it, that they do not use it for commercial purposes and that they do not alter, transform or build upon it. For any reuse or redistribution, researchers must make clear to others the licence terms of this work 2 Acknowledgements I would like to say that my PhD has been a truly rewarding journey. It gave me a great opportunity to understand, and delve deeper into matters that interested me for years. I learned more than I could imagine; and I came to realize that the research experience, though stressful at times and challenging, is something that I would surely cherish throughout my life. I would like to thank Andrea Buraschi as my PhD supervisor, whose contributions to this research are strongly appreciated. His support and guidance helped me to create an academic work that I believe I can be proud of. I would also like to convey my regards to Robert Kosowski, who has been very helpful and supportive of me since the first day.
zbw Leibniz-Informationszentrum WirtschaftLeibniz Information Centre for Economics
, 2012
"... Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle ..."
© notice, is given to the source. Locked Up by a Lockup: Valuing Liquidity as a Real Option
, 2010
"... and Virginia Tech, as well as attendees of the 1st Conference on the Econometrics of Hedge Funds (Paris) and the 3rd Conference on Professional Asset Management (Rotterdam) for helpful comments. Support from the Financial Markets Research Center and the Center for Hedge Fund Research (CHFR) at Imper ..."
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and Virginia Tech, as well as attendees of the 1st Conference on the Econometrics of Hedge Funds (Paris) and the 3rd Conference on Professional Asset Management (Rotterdam) for helpful comments. Support from the Financial Markets Research Center and the Center for Hedge Fund Research (CHFR) at Imperial College London is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Is Finance Too Big?
, 2013
"... The US spends $150 billion a year on advertising and marketing 3. $150 billion, just to trick people into buying stuff they don’t need. What a waste. There are 2.2 people doing medical billing for every doctor that actually sees patients, costing $360 billion 4-- 2.4 % of GDP. Talk about “too big!” ..."
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The US spends $150 billion a year on advertising and marketing 3. $150 billion, just to trick people into buying stuff they don’t need. What a waste. There are 2.2 people doing medical billing for every doctor that actually sees patients, costing $360 billion 4-- 2.4 % of GDP. Talk about “too big!”
unknown title
"... The dynamics of limits to arbitrage: Evidence from international cross-sectional data ∗ andrea buraschi † murat menguturk ‡ emrah sener § The Law of One Price suggests a simple arbitrage relationship that links prices of Treasury bonds when issued by the same issuer in different currency denominatio ..."
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The dynamics of limits to arbitrage: Evidence from international cross-sectional data ∗ andrea buraschi † murat menguturk ‡ emrah sener § The Law of One Price suggests a simple arbitrage relationship that links prices of Treasury bonds when issued by the same issuer in different currency denominations. This relationship was widely violated during the 2007-2008 Financial Crisis. In this paper, we use international cross-sectional data on this phenomenon to learn about the relative importance of different models of limits to arbitrage. A key source of information is a unique dataset that provides details on the cost of borrowing and the inventory of lendable bonds at brokers-dealers. We focus on four main explanations of limits to arbitrage: (i) Liquidity risk, (ii) Short-selling constraints, (iii) Leverage constraints and funding costs, (iv) Institutional frictions in the context of a large macro demand and wealth shock. We find that bond specific liquidity costs and short-selling constraintshaveonlyalimitedabilitytoexplaintheobservedelevatedbasis. Instead,we
Ratio, Closed-end Fund Discount
, 2010
"... Abstract: This paper investigates determinants and consequences of net asset value discounts in listed private equity funds. Listed private equity funds share characteristics of closed-end mutual funds and traditional unlisted private equity funds and can therefore offer insights into both. Our resu ..."
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Abstract: This paper investigates determinants and consequences of net asset value discounts in listed private equity funds. Listed private equity funds share characteristics of closed-end mutual funds and traditional unlisted private equity funds and can therefore offer insights into both. Our results have particular relevance to the pricing of unlisted private equity funds where no market prices are observable. We find that funds start at an initial premium of-2.5 % and adapt to the long-term average of-21 % after two years. Fund returns display a new and puzzling U-shaped seasonality and an exceptionally weak stock performance in buyout funds after their initial public offering. Premia predict future returns and are explained by liquidity but not by investor sentiment or the fund’s investment degree. Private equity fund premia seem to depend on credit markets and systematic risk. This relation suggests that some information about the fund’s portfolio is not reflected in net asset values.
