Costly Arbitrage and Asset Mispricing: Causal Evidence from Closed-End Funds
نویسندگان
چکیده
We examine how short sale constraints on portfolio holdings affect closed-end fund (CEF) discounts and thereby provide evidence on the causal effect of limits to arbitrage on asset mispricing. Using Regulation SHO as a natural experiment that relaxes shortsale constraints on pilot stocks, we find that discounts of CEFs holding more pilot stocks decrease relative to CEFs holding fewer pilot stocks. We also find that the effect comes only from CEFs that trade at discounts. The results suggest that a substantial part of CEF discounts is driven by limits to arbitrage.
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