Does the Japanese Closed-End Fund Puzzle Exist? An Empirical Study of the Efficiency of the Financial Market in Japan

This paper examines the efficiency of the Japanese financial market from the point of divergence of the net asset values of an ETF (Exchange Trade Fund) and its prices. "Discounts," which mean the ETF price is lower than its net asset value per share, were found on the average, and no co-integration relationships between the two variables were observed, implying that arbitrage opportunities exist. Furthermore, a correlation between the changes in the discount rates and the small capital stock index were found, consistent with the Investor Sentiment Hypothesis of the so-called closed end fund puzzle. However, these phenomena were not observed in an ETF (i.e., Standard & Poor's Depositary Receipts traded in the U.S).