Guirgui’s Mathematical Model That Will Be Compared With Shleifer – Vishny Model of Short-Termism. Evidence From the US Closed-End Funds Industry

In this article, we compare my mathematical model with Shleifer – Vishny model of short-termism. When noise traders are optimistic, then the share price increases relative to the net asset value (NAV) and funds sell at premium and therefore at small discount. In contrast, when they are pessimist, then the share price fall relative to the NAV and closed-end funds trade at a larger discount. Thus, the risk inherent in a closed-end fund consists of two parts. The risk caused from the sentiment created from noise traders and the risk of holding the fund’s portfolio from arbitrageurs. The fact that exist large discounts throughout the life of the fund indicates that different type of investors hold the fund underlying securities and the fund shares. If the same type of investors holds the same underlying securities and the fund shares, then any changes in investor sentiment will not affect and change the discount. Therefore, the share prices of the fund and the underlying securities are a function of both types of investors. As a cause of the unpredictability in the changing expectations of returns, fluctuations in the discounts arise. A mathematical calibration of noise under the Orthodox approach is measured through time varying model that focuses on the behaviour of noise traders and arbitrageur’s