Country-fund discounts and risk: Evidence from stock market volatility and macroeconomic volatility

This paper provides empirical evidence on the relationship between country-fund discounts and time-varying risk factors by analyzing monthly data of 39 closed-end country funds. By using conditional standard deviations derived from stock index returns, foreign exchange returns, inflation rates, real incomes, and interest rates to measure the risks associated with stock markets and macroeconomic fundamentals, respectively, we find significant evidence to support the proposition that fund discounts are correlated with time-varying U.S. and foreign risk factors. Additionally, among all the risk measures, the U.S. stock return volatility appears to be the most dominant risk factor to explain country-fund discounts. During the Asian crisis period, our evidence indicates that foreign exchange risk and foreign macroeconomic risk factors have a more profound impact on the country-fund discounts.