Abstract
In this paper, we develop a specific valuation model far the American perpetual put option with uncertain exercise price and empirically verify that the closed-end fund (CEF) discount puzzle can be explained by a put model.Using available sample data of 56 CEFs for the most recent seven years, we find strong empirical evidence for our discount approach. We find no significant differences between the average discounts and average returns of domestic and international funds. However, the international funds seem to have significantly greater volatility of returns than that of domestic funds, implying that foreign financial assets could be priced differently from domestic funds.
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