DETERMINANTS OF THE CHINESE CLOSED-END FUND PREMIUM: FUND SIZE, VOLATILITY, MANAGERIAL ABILITY AND SUBSTITUTION EFFECT OF OPEN-END FUNDS IN THE PRE AND POST CRISIS PERIODS

Abstract

In this paper we examine the determinants of the Chinese closed-end fund premium. We find that premium is negatively related to NAV, age, liquidity, premium volatility, managerial ability and the substitution effect of open-end funds, and positively related to market and closed-end fund volatilities. The results suggest that investors value low NAV and low liquidity closed-end funds, because they offer greater upside potential given high market and fund volatilities. We also find that premium has a concave relationship with fund size. Results from pre and post financial crisis 2008 analyses suggest that investors began to recognize the importance of managerial ability over unit NAV after the crisis. Investor behaviour also changed post crisis, where the relationship between premium and fund volatility changed from negative to positive from pre to post crisis. This could be because Chinese funds became more attractive relative to the USA and UK funds, as developed economies were more adversely impacted by the crisis.