Examples from Closed-End Country Funds

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Del curso dictado por Rice University

Biases and Portfolio Selection

105 calificaciones

Rice University

Biases and Portfolio Selection

105 calificaciones

Curso 3 de 5 en SpecializationInvestment and Portfolio Management

Investors tend to be their own worst enemies. In this third course, you will learn how to capitalize on understanding behavioral biases and irrational behavior in financial markets. You will start by learning about the various behavioral biases – mistakes that investors make and understand their reasons. You will learn how to recognize your own mistakes as well as others’ and understand how these mistakes can affect investment decisions and financial markets. You will also explore how different preferences and investment horizons impact the optimal asset allocation choice. After this course, you will be more effective in overcoming biases to do the wrong things at the wrong times and tailoring an investment strategy that is best suited on your or your client’s profile and investment needs.

De la lección

Inefficient markets

In this module, we review a number of puzzles related to the aggregate stock market and the cross-section of average stock returns that have been documented in the literature. We examine how the behavioral biases and tendencies discussed in the previous module might result in some of these puzzles observed in financial markets.

Equity premium puzzle9:25

Volatility puzzle12:18

Closed-end fund puzzle10:30

Examples from Closed-End Country Funds5:51

Conoce a los instructores

Arzu Ozoguz
Finance Faculty
Jones Graduate School of Business

But there's more.

Now, let me tell you a couple of fascinating examples from

country funds, right.

So country funds, are an example of close end funds, which

provide you a convenient way of buying for example, a package of foreign stocks.

And unlike the mutual funds, unlike your average open end mutual funds,

these funds issue a fixed number of shares that trade on the market.

And again at a premium or a discount to their underlying net asset value.

Now a dramatic example is the Germany fund.

So, the graph here illustrates the price of the Germany Fund

in the period from July the 86 to April 1998.

All right, so this is the fund price.

Now can you tell from this graph when the Berlin Wall came down?

Right?

Well most people guess that the spike in

the graph is the day November 9th 1989.

Oops.

Right?

When the wall came down.

And that would not be a bad guess.

But actually this spike came some months later.

Now you can ask what proportion of that spike came

from sentiments versus fundamentals, you decide.

But a symbolic event like the fall of the Berlin Wall in fact had implications

far beyond the price of the Germany fund.

And in fact if we look at similar graphs,

right of prices histories for the closing funds in Italy,

Spain, Thailand, China, we would be seeing exact similar patterns.

They all displayed the spike pattern at the same time.

All right, now clearly, the fall of the Berlin Wall is a very salient event.

Well you might ask, are premiums and discounts of close end

funds also affected by the saliency of events, right?

For example, that will be consistence with investors being subject to

availability bias, and in fact that does appear to be true, right.

For example the discounts on closed-end funds trade in the US markets,

right on US exchanges,

appear to be affected by the saliency of news covered in the US press, right.

So let me give you an example.

All right so, this is a fascinating example involving the First Israel Fund.

So on December 18, 1992, the New York Times ran

a three-column article headline, with this following headline.

Israel Expels 400 from Occupied Lands,

the Lebanese Deploy Bar Entry of Palestinians.

The discount in the following week,

in the week that followed the appearance of this article,

the discount on the fund Widened from 14.8 or

9 to slightly over 15%, 15.55%.

Okay, now a three-column headline is

less salient than a six-column headline, right?

So on September 14, 1993, the story announcing

the Peace Corp between the government of Israel and

the PLO at the time, was a six column headline.

And what happens?

Well the premium of the First Israel fund

jumped from 1.7 % to 7.7 %.

So here we're measuring the saliency of the news by the length of the columns.

Three-column headline versus a six-column headline.

And obviously, the six column headline has much more effect, right?

Now, furthermore, if the news

doesn't appear in the US, right?

In other words, if the news is not salient to investors in the US,

even if it's relevant to the underlying value,

the fund price doesn't even move right.

Now think about it, the net asset value of a country fund is determine by the events

in the whole market, but the closed-end country fund is being traded in the US,

and is therefore subject to the sentiment of the American investors.

All right, so in this lecture you learn

about the closed-end fund puzzle.

The fact that closed-end fund prices trade at values that

are significantly different from their underlying net asset value.

And volatile investor sentiment appears to be the main driver behind these discounts.

And this is particularly evident in the case of country funds

where saliency of the news becomes relevant

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