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Components of risk for investment trusts

This thesis examines various aspects of risk for UK investment trusts from the shareholders' viewpoint. For conventional trusts, a model is developed which splits the variance of returns to shareholders into three components - variance of net asset value (NAV) returns, variance of discount returns and twice the covariance between NAV returns and discount returns. Using historical data, the relative importance of each of these components is estimated for different return intervals and for different periods of observation. There is clear evidence of excess volatility of trust share returns compared with NAV returns. Since Big Bang in 1986, there has been a significant 'double whammy' effect, meaning that discounts tend to widen when NAVs fall and narrow when NAVs rise. Overall, the results contradict the efficient market model but are consistent with the noise trader model. Discount volatility is generally an important component of total risk for conventional trusts using monthly returns but there is considerable cross-sectional variation in the magnitude of this discount volatility. These are interesting aspects of the closed-end fund discount puzzle which have received little attention in the literature, and a cross-sectional analysis is carried out to explain the variation in discount volatility across the sector. The results suggest that the main drivers of discount volatility are new information hitting the market for trust shares and volatility of NAV returns. Discount arbitrage traders try to take advantage of discount anomalies but their activities are restricted, particularly for less marketable trusts. There is no evidence that either individual investor sentiment or UK specific sentiment has any impact on discount volatility. Statistical measures of risk based on historical data are useful tools for conventional trust securities but are of limited use for split capital trust securities. Analysts are often more concerned with the sensitivity of these securities to changes in the underlying fundamental variables and an alternative approach to the risk assessment of split capital trusts is proposed.
Date January 2000
CreatorsAdams, Andrew Theo
PublisherUniversity of Edinburgh
Source SetsEthos UK
Detected LanguageEnglish
TypeElectronic Thesis or Dissertation

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