Mispricing Explanations of Closed-End Funds: A Survey Review

Abstract

The aim of this survey is to review the most prevailing developments regarding the existence
of the closed-end funds’ discounts and premiums and the factors which generate them.
Despite the plethora of academic research conducted in order to reach a generally accepted
explanation of the closed-end fund puzzle based on both the traditional and the behavioral
approaches, particular attention is still required to be payed to the pricing of closed-end funds
in the academic literature to date. As the divergence between the closed-fund market prices
and their fundamental values offers great challenges to a possible interpretation, this study
summarizes a set of conclusions that can help researchers and practitioners study better this
financial asset category.

This paper is organized as follows: Section 1 summarizes the basic reference for closed-end
funds; Section 2 captures the different theories on the existence of closed-end fund puzzle;
Section 3 analyzes the theories of discount according to the main traditional interpretations;
Section 4 reviews the explanation of discounts taking into account the investor behavior
arguments; Section 5 deals with closed-end funds in the international financial environment;
and Section 6 provides the conclusions.

JEL Classification: G10, G12, G20