Speculation and Closed-End Fund Puzzle in Chinese Markets

A new approach has been proposed to give explanations to closed-end fund puzzle. The price of an asset can be decomposed into two parts: fundamental value and speculative value. Speculative value can be viewed as an American option value and comes from heterogeneous beliefs between investors. Generally, speculative value of trading closed- end funds is less than that of trading stocks, so discounts on closed-end fund NAVs occur. Empirical study shows that the new approach gives well explanations to closed-end fund puzzle in Chinese markets.