Closed-end Fund Discounts and Individual Investor Trading

This paper investigates the individual investor trading in both closed-end funds and individual stocks. By examining the short-horizon dynamic relation between net individual investor trading of closed-end funds and the fund discounts, we find evidence consistent with the notion that both the level and the changes in close-end fund discounts are good proxies for individual investor sentiment. Using this sentiment proxy, we look at the net individual trading in stocks. We find that individuals seem to trade against sentiment in small stocks. A possible explanation is that small stocks may be the investment vehicle alternative to closed-end funds, i.e. when individuals sell closed-end funds, they buy small stocks instead. We also find that individual trading in large stocks seems to be driven by sentiment.