A Behavioural Explanation of the Discount Persistence. A Comparative Study of US Closed-End Funds

Discount persistence explanation from a behavioural point of view is a new area of research for both academics and practitioners. The interactions of both arbitrageurs and noise traders during the life of the fund will enable us to detect the effect of discount persistence based on an investor sentiment model. We measure the degree of variability of discounts over time, which is due to the effects of noise trader and other factors such as market risk, size effect, book to market effect, momentum and expenses. De Long, Shleifer, Summers and Waldmann or DSSW (1990), provide no indication of how much of the variability is due to investor sentiment. On average Guirguis six factor model (I) can explain 66% of the variation in the excess discount return in the US market by taking into consideration retail flows as a noise proxy in relation to other factors as mentioned above. The second model of Guirguis (II) six factor model can explain on average 33% of the variation of the discount by using a sentiment index and keeping the other factors the same