a first look at closed-end strongfundsstrong in china - jpkc.whu.edu.cn.pdf

A First Look at Closed-end Funds in China Gongmeng Chen Oliver Rui and Yexiao Xu ∗ This version: May 2002 Abstract This paper documents a number of stylized facts about Chinese closed-end funds. Although Chinese capital markets are immature, and the first closed-end fund was sold in 1998, many characteristics of the closed-end funds resemble those in the US market. In particular, (1) there are substantial and persistent discounts to the majority mutual funds; (2) most closed-end funds enjoy high premia at the IPO and disappear after six months; and (3) discounts predict future fund returns. We also document that the pre- mium on a fund is positively related to its return persistence, and negatively influenced by the residual volatilities of underlying assets at the IPO stage. Discounts occuring in the post IPO stage are determined by the managerial ownership and the risk adjusted performance of the underlying assets. In addition, we show that discounts fluctuate with the trading volume and the market return over time. Due to the unique feature of the Chinese market, we believe that “investor sentiment”, imperfect arbitrage, per- formance, and a “momentum effect” are major factors for premia or discounts in the Chinese closed-end fund market. ∗Chen and Rui are with Department of Accountancy, the Hong Kong Polytechnic University, Xu is at the School of Management, The University of Texas at Dallas. We are grateful to Burton G. Malkiel, Jeff Pontiff, Ravi Ravichandran, and seminar participants in 2002 European Financial Management Association confe