Impact of liquidity on premia/discounts in closed-end funds

This paper examines the impact of market liquidity on the premia/discounts in closed-end funds. The central conjecture is that premia (discounts) are observed when claims issued by the fund are more (less) liquid than the underlying assets. The empirical results strongly support the liquidity conjecture: funds with higher liquidity, as measured by proxies for trading activity, have higher premia (or lower discounts) than funds with lower liquidity. This relationship is observed in equity funds as well as in bond funds. Further, the results are robust to various assumptions about model parameters and error structures. Overall, the liquidity hypothesis is supported in our data and may offer a richer description of the premia/discount phenomenon in conjunction with existing hypotheses.