An Analysis of Closed End Funds Discount Puzzle

Abstract

Purpose - This study aims to analyze the influence of fund characteristics, market characteristics and underlying assets characteristics on the closed end funds discount.

Design/methodology/approach – We selected quarterly data for 10 closed end funds traded at Karachi Stock Exchange from first quarter of 2005 to second quarter of 2015. We deployed pooled ordinary least square method to explain the relationships.

Findings – Among Fund characteristics; diversification, among market characteristics; KSE 100 index return, consumer price index and real exchange rate and among underlying asset characteristics; financial leverage, return on equity and market capitalization have significantly influenced the closed end funds discount.

Research limitations/implications – The study has a novel contribution in explaining the tendency of the discount. The current study investigates the impact of fund characteristics, underlying assets characteristics and market characteristics on the funds discount. However, the existing studies lacks in explaining the relationship between underlying asset characteristics and the discount.

Originality/value – Our results are robust from all biasness and discrepancies, since, we robust the model by rectifying the serial correlation problem indicated by Wooldridge test. Moreover, all the analysis and results are the authors' original works. Additionally, we propose that Closed End Funds Discount is a function of funds characteristics, market characteristics and underlying assets characteristics.

Keywords: Closed end funds discount, investment, funds characteristics, market characteristics, underlying assets characteristics