On the Existence of Stock Price Bubbles—The Smoking Gun—Discounts and Premiums on Closed-End Funds and ETFs

Abstract

It is continually debated in the academic and professional literature whether stock prices exhibit or have exhibited bubbles. In this article the author argues that the persistence of closed-end fund (CEF) and exchange-traded fund (ETF) discounts and premiums, a phenomenon believed to be inexplicable by rational asset pricing theory, is due to the existence of stock price bubbles. Price bubbles in the stocks underlying the funds and in the market prices of the fund shares themselves generate the discounts and premiums. This rational asset pricing theory that explains the persistent of these discounts and premiums on CEFs and ETFs across both time and varying market conditions represents the proverbial smoking gun proving the existence of stock price bubbles.

TOPICS: Exchange-traded funds and applications, mutual funds/passive investing/indexing, exchanges/markets/clearinghouses