Title: A rational model of the closed-end fund discount
Description: "The discount on closed-end funds is widely accepted as proof of investor irrationality.  We show,however, that a parsimonious rational model can generate a discount that exhibits many of the characteristics observed in practice.  The only required features of the model are that managers have (imperfectly observable) ability to generate excess returns; they sign long-term contracts guaranteeing them a fee each year equal to a fixed fraction of assets under management; and they can leave to earn more money elsewhere if they turn out to be good.  With these assumptions, time-varying discounts are not an anomaly in a rational world with competitive investors -- they are required"--National Bureau of Economic Research web site.
Subjects: Closed-end funds, Discount, Econometric models