A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory. (27th February 2019)

• Record Type: Journal Article
• Authors: Jarrow, Robert; Protter, Philip
• Is Part Of: Mathematical finance. Volume 29:Number 4(2019)
• Page Start: 1157
• Page End: 1170
• Publication Date: 2019-02-27
• Subjects: asset price bubbles -- closed‐end funds -- ETFs -- no arbitrage -- D53 -- G12 -- G14; Business mathematics -- Periodicals; 332
• DOI: 10.1111/mafi.12207
• Languages: English
• ISSNs: 0960-1627

Abstract

Abstract: This paper provides a new explanation for closed‐end fund (CEF) discounts and premiums using the local martingale theory of asset price bubbles. This is a rational asset pricing model that is shown to be consistent with the existing empirical evidence on CEF discounts/premiums. Additional testable implications of the model are derived, which await subsequent research for their resolution. This bubble theory also applies equally well to understanding discounts and premiums on exchange traded funds.