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Investor Sentiment, Herding, And The Closed-End Fund Discount

Aug. 06, 2018 1:53 PM ETVIG, VYM, JNK10 Comments
Alexander Halliday profile picture
Alexander Halliday


  • The CNN Fear and Greed Index was tested as a predictor of the CEF discount.
  • Herding behavior in investors was tested as a predictor of the CEF discount.
  • This study found that investors herd toward closed-end funds that announce distribution increases.

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Closed-end funds (CEFs) present a unique opportunity to study finance in that the price of shares rarely matches the net value of the underlying holdings. This study investigates this phenomenon and how behavioral finance influences the discount. The study uses time-series regression analysis to examine the CNN Fear and Greed Index and its relationship with CEF discounts over time. Results of vector autoregression (VAR) and Granger-causality testing indicate that investor sentiment does not significantly influence the price of CEFs in relation to their net assets. Autoregressive conditional heteroskedasticity (ARCH) models show that the volatility of investor sentiment does not significantly influence the volatility of the CEF discount, but there is an autoregressive component to movements in the discount. ARIMA models show that the time series functions of investor sentiment and the CEF are cointegrated, but with no significant causation. In addition, the impact of herding on the CEF discount was evaluated using simple linear regression to show that the herding behavior of investors toward CEFs with higher distribution yields causes the fluctuation in the CEF discount. Investors may use this information to better understand the relationship between investor sentiment, herding, and the valuation inefficiencies of closed-end funds.

Background of the Study

It is well understood that investors act in their own best interest when allocating capital. The primary goal of investing is to maximize return. The field of finance has developed to help individuals assess the risks and returns associated with investing decisions, and to provide a set of tools to allow individuals and

This article was written by

Alexander Halliday profile picture
Dr. Alexander Halliday is a former investment and commercial banker with over 30 years of investing experience. He specializes in high-yield investing strategies. He has a doctorate (summa cum laude) in business management. His area of expertise is behavioral finance.

Analyst’s Disclosure: I am/we are long RSP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

I have long positions in JDD, JRS, GGT, GAB, THW, PDI, and RMT. These are not specifically mentioned in the article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

XXthCentMan profile picture
Congrats on joining the stable of S A cef writers. S A has really picked up a large group of interesting writers who cover cefs. It seems to have become a specialty of theirs.
Left Banker profile picture
Interesting paper. Thank you for sharing it here. As i was reading this I said to myself "reads like an academic paper." Then I came to the last lines.

It's a worthwhile read for anyone who invests in CEFs, even those of us who are forced (by insufficient statistical expertise) to gloss over some of the denser parts. For me, it validates with hard data the sorts of things I've been using in my own CEF investing strategies. Primarily watching the distributions and trying to get ahead of the curve as much as an individual investor can.

For example, my oft-state views that:
The losses from a deep distribution cut, especially for a fund that has a premium, can outweigh any gains over an extended time frame, so getting out too early is not a mistake if you sense one is coming.
But, those same distribution cuts can be buying opportunities.
Distribution increases can be buying opportunities as well but you have to be quicker on your feet to profit from them.

Anyway, thanks for the read. Welcome to Seeking Alpha as a contributor. Hope to see more in the future.
Alexander Halliday profile picture
I appreciate your comments. I was trying to do a scientific study to back up my preconceived notions of what moves CEF prices. There are so many investing strategies to chose from. I wanted to test what actually works vs. urban legends.
tech attorney profile picture
This is a great, informative article. @Left Banker @Steven Bavaria @Alpha Gen Capital @Stanford Chemist @Nick Ackerman , you guys might want to check this out.
Nick Ackerman profile picture
Thank you for the tag, very interesting read!
It seems like the above mentioned guys are sometimes responsible for the "herding". Is it intentional ?
tech attorney profile picture
Providing informed, insightful analysis for free on a website available to the general public is herding? 🤔
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

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