Groupe d’études et de recherche en analyse des décisions

G-2011-06

Canadian Investors and the Discount on Closed-End Funds

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We explore the role of the discount on closed-end funds (CEFD) in asset pricing and weakly tests its validity as a proxy for sentiment in the Canadian stock market. Results show that CEFD is not a priced factor. Both cross-sectional and time-series tests confirm that stocks with different exposures to CEFD do not have significantly different average returns. CEFD does not even provide incremental explanatory power after controlling for firm characteristics and risk factors. This evidence, together with the findings from our weak test of CEFD as a sentiment index, suggests that CEFD is unlikely to be driven by sentiment in Canada.

, 24 pages