A Multi-Factor Model of Excess Discount Return: A Comparative Study of UK Investment Trusts and US Closed-End Funds

Abstract

This article provides an explanation of the fluctuations and persistence of excess discount return in the UK and the US. On average, Guirguis six-factor model can explain 67% of the variation in the excess discount return in the UK market by taking into consideration the market effect, size, the book-to-market effect, momentum, sentiment and expenses. In contrast, FAMA and French’s (1993) three-factor and Carhart’s (1997) four-factor models explain only 42% of the variation of the excess discount return in the UK. Similarly, Guirguis six-factor model can explain 66% of the variation of the excess discount returns in the US market by taking into consideration the same six independent variables. In contrast, FAMA and French’s (1993) three-factor model explains 59% of the excess discount returns variation and Carhart’s (1997) four-factor model explains 65% of the variation.