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
