Short Selling Behavior When Fundamentals are Known: Evidence from NYSE Closed-end Funds, by Sean M. Flynn (November 2004; Revised January 2006)
The larger a closed-end fund’s premium over its portfolio value, the more intensely it is sold short. However, the intensity of short selling affects neither the rate at which premia mean revert to fundamental values nor the rate of return on fund shares. Consequently, short selling does not appear to constrain the mispricings found among closed-end funds. However, closed-end fund factor loadings in Fama French (1992) regressions are consistent with fund portfolio risks, suggesting that some form of arbitrage is bringing fund prices into line with fundamentals—despite the apparent inability of short selling to limit closed-end fund mispricings.