Introduction

Abstract

In part II of the study we investigate the pricing of equities. Within this asset class we draw our attention to the case of closed-end funds. We first describe the specific characteristics of closed-end funds and their motivating features for financial research, especially for issues of pricing. Thereupon, we develop a valuation model in chapter 7 by means of contingent claim pricing techniques attempting to capture the certain financial characteristics of closed-end funds. The stochastic pricing model especially takes into account both the price risk of the funds as well as their risk associated with altering discounts. Chapter 8 describes a possible implementation of the pricing model and introduces the estimation techniques used in the further analysis. For the empirical adaptation of the valuation model we use a sample of closed-end equity funds that invest in emerging markets and are traded on the New York Stock Exchange. The statistical inferences are based on a historical sample for the five-year-period of 1993 to 1997 using maximum likelihood estimation based on a Kaiman filter algorithm. We estimate the relevant parameters and validate our model. In chapter 9 we are able to infer insights into two potential applications for investors. First, we test the forecasting power of the pricing model to predict closed-end fund market prices. Second, based on information that is revealed in the valuation model, we implement portfolio strategies using trading rules.