The Empirical Study of Liquidity Risk and Closed-End Fund Discounts Based on Panel-Data

Abstract

Within the bounds created by limits to arbitrage and the transaction costs there are many dimensions in which characteristics of CEF shares and its underling portfolios can differ. Both theoretical studies and empirical evidence have shown that liquidity is a factor for capital asset pricing. This paper uses a data-based panel linear regression model to investigate the sensitive analysis of CEF discounts to illiquidity. We find that Chinese CEF discounts and fund spread are significantly and positively affected by illiquidity of fund shares, illiquidity of the market, illiquidity of fund underlying portfolios, and the difference between illiquidity of fund shares and its underlying assets has significantly and positively influence on discounts. Expected and unexpected illiquidity of fund shares are significantly and positively associated with discounts and fund spread. To some extent, these relations between illiquidity and discounts may explain the high volatility of Chinese CEF discounts. Discounts contain liquidity risk premium.