Dual-price Integration Risks and Closed-end Fund Premiums

In a frictionless world, a closed-end fund’s (CEF’s) premium equals its price minus both its NAVPS (net asset value per share) and present value of the net benefits (PVNB) from liquidity enhancement, managerial abilities after costs, and leverage. The premium can differ further due to frictions resulting from uncertainties about a CEF’s PVNB and its holdings. Complete hedge positions between CEF prices and NAVPS are not possible since their concurrent daily directional changes are not perfectly integrated. We are able to explain over two-thirds of the variation in premiums or their changes for U.S. equity CEFs. As expected, the CEF premium is positively related to liquidity enhancement, CEF performance and net leverage, and negatively related to management fees, gross leverage, cash and bond holdings, and proxies for price equilibrating risks.