On the dual characteristics of closed-end country funds

Abstract

In a mildly segmented world market, closed-end country fund (CECF) returns and premiums (or discounts) would be determined by factors due mainly to market segmentation and investor sentiment. The role of these two types of factors has been debated. We reexamine this issue by examining the relative importance of US market returns and foreign market returns in determining CECF returns. By employing time-series empirical methods, we find that CECF returns are more heavily influenced by their local (foreign) market returns than by US market returns, which implies that there remains a substantial diversification benefit from investing in CECFs.