The Closed-End Fund Puzzle Between Classical Finance and Behavioral Finance: A Survey

Abstract

This paper presents a thorough review, including the authors' latest thinking, of one of the most persistent and troubling puzzles to the efficient market hypothesis: the closed-end fund puzzle. Financial economists have intensely scrutinised the economic explanations of the discount within the context of the efficient market hypothesis. Unfortunately, empirical evidence show that none of the traditional explanations individually accounts for all aspects of the closed-end fund discount. The failure of economic hypotheses to explain the closed-end fund discount leads many authors to explore behavioral explanations. We outline then the psychological evidence for this phenomenon and give a taxonomy for an array of factors that come under the common label of sentimental hypothesis.