Closed-end fund discounts with informed ownership differential

We develop a multiasset trading model to examine the closed-end fund discou nt. The model shows that the discount can arise if the quality of private i nformation in the underlying assets is sufficiently better than in the fund . The model also indicates that a discount (premium) can arise if the exces sive volatility of the Fund dominates (is dominated by) the fund's diversif ication benefit. Moreover, the model predicts: a negative relation between the discount and the institutional ownership differential, as arbitrageurs prefer funds with large discounts. Using a sample of U.S. equity closed-end funds, we test these predictions and find supporting evidence. (C) 2001 Ac ademic Press.