Closed-end Mutual Fund Puzzle and Market Efficiency: Option Theoretic Analysis

The purpose of this study is to theoretically explain the 'Closed-end mutual fund (CEF) puzzle' which is one of the unsolved issues in finance area. The CEF puzzle is the phenomenon that the fund is priced lower or higher than the net asset value(NAV) of the fund in the market, and it is frequently cited as a counter example of efficient market hypothesis(EMH). According to our analysis, both premiums and discounts on closed-end mutual fund can exist even in the context of efficient markets since both premium and discount can be specified as the values of put options. In this paper, we focus primarily on the theoretical nature of premiums on closed-end mutual funds. Some useful implications are then provided through sensitivity analyses. for studying the temporal behavior of the premiums or discounts.