Work detail

Open-Ending of Closed-End Funds in the CR

Author: Mgr. Jana Fajtová, Ph.D.
Year: 2004 - summer
Leaders: prof. Ing. Michal Mejstřík CSc.
Work type: Dissertations
Language: Czech
Pages: 151
Awards and prizes:
Abstract: This thesis analyses key indicators of Czech closed-end funds during their open-ending process. The hypotheses have been tested using weekly data for 28 closed-end funds from April 1995 to April 2003. The main aim of the thesis is to enrich existing findings of the open-ending of closed-end funds and thus contribute to the explanation for basic questions concerning the existence of the closed-end funds discount. The essential merit of this thesis lies in extension of tiny group of studies, which deal with closed-end funds puzzle in case of emerging capital market.
The closed-end funds discount represents one of the anomalies in the field of finance and capital market. Securities of closed-end funds are issued at a premium to net asset value (NAV). Subsequently, within a matter of months, prices of closed-end funds securities fall and the securities are traded at a discount, which persists and fluctuates according to a mean-reverting pattern. Upon termination (liquidation or open-ending) of the fund, securities prices rise and discounts disappear.
Closed-end fund discount represents a challenge to the hypothesis that investors behave rationally and provide apparent evidence of market inefficiency. It is not surprise that the closed-end funds have attracted the attention of leading scholars in finance. Neither economic explanations for the discount within rational expectation framework (e.g. emphasizing biased NAV estimates, agency costs, tax-timing options and market segmentation), nor an alternative approach presuming that investors possess limited rationality (due to informational and risks asymmetries between different categories of investor) provide a full explanation for the discount.
Based on the facts outlined above, the primary hypothesis has been formulized as follows: The discounts of Czech closed-end funds had been falling as a consequence of open-ending process (and decrease in the discount had been caused by increase in funds prices). Particular hypotheses have been deduced from this primary hypothesis.
The price and discount reaction of closed-end funds to the key events associated with the open-ending process has been tested. The findings indicate a statistically significant reaction to the change of regulation. On the other hand, there was no statistically significant reaction to the public announcement regarding the open-ending of each individual fund. Apparently the influence of this announcement had been already incorporated in the reaction to the first event that constituted an open-ending obligation. The key discount fall was observed within a month after the event announcement. The funds, which had not completed the open-ending process within an adequate period exhibited on average higher discount than other funds.
A factor model of the changes in the discount has been created. Its parameters have been estimated separately for the period before the announcement of regulation change (which constituted an open-ending obligation) and for the period after the announcement of regulation change. The results indicate that the discount had been influenced mainly by management group factor and mean-reversion factor during the studied periods. In case of approximately about two third of the total number of funds under the investigation, the influence of explanatory variables on the changes in the discount was different for the period before the announcement of regulation change and the period after the announcement of regulation change.

Downloadable: Dissertation Thesis - Fajtová


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