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A NAV a Day Keeps the Inefficiency Away? Fund Trading Strategies Using Daily Net Asset Values

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Abstract

Previous research documents the value of closed-end fund trading rules based on the size of the weekly discount. The growing number of closed-end funds that provide daily net asset value data provides an opportunity to test the profitability of short-term fund trading strategies. We find that short-term trading strategies that purchase fund shares after large negative discount changes are profitable, on average, even when transaction costs are incorporated. However, strategies that short sell fund shares after large positive discount changes do not produce an average profit. The limited amount of trading in closed-end funds may make it difficult to achieve short-term profits from discount fluctuations.

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... Gentry, Jones and Mayer (2004) propose a REIT trading strategy based on a long/short portfolio of high/low discounts and find alphas of about 1.5% per month "with little risk." Hughen, Mathew and Ragan (2005) utilize large changes in the discount based on daily NAV to trigger short term trading. They find short term trading succeeds even after transaction costs. ...
... 11 See e.g. Hughen, Mathew, and Ragan (2005). ...
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Closed-end fund assets, fourth quarter Available at: www.ici.org/ stats/ce/index.html
Investment Company Institute. (2004). Closed-end fund assets, fourth quarter 2003. Available at: www.ici.org/ stats/ce/index.html. Accessed April 2004.
  • C Hughen
C. Hughen et al. / Financial Services Review 14 (2005) 213–230
describe how investors can earn excess returns from real estate investment trust when the prices of these investments significantly differ from their NAVs
  • Jones Gentry
This phenomenon is not limited to closed-end funds. Gentry, Jones, and Mayer (2003) describe how investors can earn excess returns from real estate investment trust when the prices of these investments significantly differ from their NAVs.