Closed-End Funds and their Net Asset Value over time : A study of the relationship between Swedish closed-end funds' market prices and their underlying assets over a period of time.

Abstract: Closed-end funds (CEFs) are popular investments amongst the Swedish population as they provide diversification to investors and have in many cases historically outperformed the market. In deciding whether to invest in a CEF, the method of valuation differs from classical financial ratios used to value most companies, as the revenue-bringing operations differ significantly. The Net Asset Value (NAV) per share is compared to the market price per share of a CEF, to determine if the share is traded at a discount or premium. The purpose is based upon the rationalization that a share’s market price and the value of the closed-end fund’s underlying assets cannot drift too far apart from each other. In other words, the discount cannot drift too far from its mean over time, as there would be an upward pressure on the share price if the NAV-discount is large, and a downward pressure on the share price if the premium is large. Tests of unit roots and cointegration are applied and analysed in the light of previous findings for discounts in CEFs. Our findings show that the majority of selected CEFs’ prices and NAVs have long-run equilibrium relationships. Additionally, the discount appears to be stationary over time for the majority of CEFs, supporting the notion of mean reversion in the discount. For certain Swedish CEFs, the findings allow for investment decisions to be made upon the deviation from the mean. This study contributes to previous research done on the topic of mean reversion in the financial market as it finds statistical evidence of mean-reverting process for the NAV-discount of Swedish CEFs. The thesis also provides additional value to the plethora of research provided in the financial field as it specifies its findings to the Swedish market of CEFs.