If arbitrage is costly and noise traders are active, asset prices may deviate from fundamental values for long periods of time. We use a sample of 158 closed‐end funds to show that noise‐trader sentiment, as proxied by retail‐investor flows, leads to fluctuations in the discount. Nevertheless, we reject the hypothesis that noise‐trader risk is the cause of the long‐run discount. Instead we find that funds which are more difficult to arbitrage have larger discounts, due to: (1) the censoring of the discount by the arbitrage bounds, and (2) the freedom of managers to increase charges when arbitrage is costly.

This paper investigates the short-term price behaviour of closed-end funds following eight large market-wide shocks. The findings, from a sample of 63 funds continuously traded on the London Stock Exchange, indicate that prices overreact relative to equilibrium given by net asset values. The speed of reversion in discounts following market-wide shocks is slower than that following fund-specific shocks of a similar magnitude. The post-shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity, as proxied by fund size, or to the speed of recovery in the broader market. The discount decays more slowly for those funds that are difficult to arbitrage.

In this paper we document the short-term stock price behaviour following a period of stock market stress. We focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989–1998. Our results are not consistent with the overreaction hypothesis. We find positive (negative) abnormal price performance in the short-term window (up to 10 days) following positive (negative) price shocks. Our analysis also highlights differences between developed and emerging markets. We show that the post-shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s. We find the size of the after-shock tremors to be related to market liquidity, with larger post-shock price changes in less-liquid markets.