Abstract:

Past studies tend to depict closed-end fund (CEF) discounts as a measure of individual investor sentiment. While exchange-traded funds (ETFs) are traded by institutional investors by a much higher proportion than CEFs, this paper examines the proposition that premiums or discounts on ETFs are driven by a combined sentiment of institutional and individual investors and hence can act as a proxy for a broader investor sentiment or a more predictive index of market sentiment. The proposition implies that premiums on various ETFs move together, are correlated with prices of other securities which are affected by the same investor sentiment, and can predict stock returns better. We employ correlation analysis, regression analysis, vector autoregressive analysis, and Granger causality test and evidence ETF premiums not only a more comprehensive sentiment indicator but also a prophetic indicator compared to CEF discounts. ETF premiums as a sentiment indicator can predict future returns on various-cap stock portfolios which cannot be attained by CEF discounts. The levels of ETF premiums Granger cause the levels of CEF premiums whereas changes in CEF premiums Granger cause changes in ETF premiums. Keywords: Exchange-Traded Fund, Investor Sentiment, Closed-End Fund Puzzle.

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