Excess volatility and closed-end funds

If investors are rational, the variance of closed-end mutual fund returns should equal the variance of the underlying securities in their portfolios. In fact, this paper shows that the average closed-end fund's monthly return is 64 percent more volatile than its assets. Unlike variance-bounds tests, this facilitates an excess volatility test that does not rely on strong assumptions about discount rates or dividend streams. Although largely idiosyncratic, 15 percent of the average fund's excess risk is explained by market risk, small-firm risk, and risk that affects other closed-end funds.