Abstract
Many studies have attempted to reconcile the behavior of closed-end fund prices with notions about the behavior of investors. Such studies have appealed to frictions (taxes, agency costs, and illiquidity) and investor sentiment to explain the puzzling behavior of fund prices. The events of December 1994 in Mexico, and subsequent effects on some funds' prices, have given rise to a new puzzle, extreme premia on closed-end funds that invest in Mexican stocks. We believe this new puzzle is not amenable to explanation by extant hypotheses. We offer a hypothesis of loss-aversion on the part of individual investors as a possible explanation, and outline the relevant effects that loss-aversion should have on fund discounts.
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