Sentiment and the Interpretation of News about Fundamentals, by Sean M. Flynn (August 2005)
The reaction of closed-end fund share prices to changes in portfolio values is on average the same whether funds are trading at discounts or premia and whether the changes in portfolio values are positive or negative. If closed-end fund discounts and premia do correctly measure investor sentiment, then these results suggest that investor sentiment does not affect the market’s reaction to news about fundamentals. Alternatively, discounts and premia may not in fact measure investor sentiment, or sentiment may play no role at all in closed-end fund pricing. Noise-trader risk and trading costs also fail to explain the observed behavior.