Abstract
The (volume-synchronized) probability of informed trading (PIN) is a relative proxy for adverse selection (flow toxicity) in securities trading. We find that (V)PIN puzzlingly explains the discount of U.S. exchange-listed funds. While (V)PIN can unintentionally represent behavioral biases, we suggest the “proportion measure of purchased futures losers or sold future winners” as a more direct proxy for behavioral biases. While the proportion measure is positively and significantly correlated with (V)PIN and the value-weighted discount of closed-end funds, it is unrelated with the price impact parameter, the adverse selection component of the bid-ask spread, and the illiquidity measure. A risk factor defined as the highest-over-lowest excess return of sorted portfolios in terms of the proportion measure, well explains the return of listed funds along with the well-known factors. Lastly, the co-movement of closed-end and exchange-traded fund pairs is pronounced for developed markets and is influenced by the proportion measure.KeywordsTrade-and-Quote databaseProportion of purchased future losers or sold future winnersImbecile-minus-wise factorBehavioral biasesClosed-end fundExchange-traded fundProbability of informed trading (PIN)Volume-synchronized PINValue-weighted discountRobo-advisor
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