A Factor Model of the Closed-End Fund Discount.” Working paper

Abstract: There have been many attempts to explain the discount to net asset value of closed-end funds. However, previous models of the discount have been limited to using a small number of domestic equity market factors, notably the market, small firm and market-to-book factors. These risk factors have limited explanatory power, and additional factors are required to explain a substantial proportion of movements in the discount. We consider five such factors, the seasoning of the fund, the influence of its sector, a measure of mean-reversion in the discount, the impact of the fund’s manager and the performance of the fund. The results show that this extended palette of factors explains approximately 34 percent of changes in the discount of a large sample of British closed-end funds. 1