Investigating the role of illiquidity in explaining the UK closed-end country fund discount

- Country illiquidity plays a significant role in the discount of emerging market funds.
- In developed market funds country illiquidity is not significant.
- Fund illiquidity is significant for developed but not for emerging market funds.
- The financial crisis has had a widespread effect on the discount and illiquidity.
- Emerging market funds have recovered to pre-crisis levels more quickly.

In this paper we examine whether the UK closed-end country fund premium is related to the illiquidity of the UK fund or the illiquidity of the country in which the fund invests. We also consider whether emerging market country funds behave differently in terms of their premium and illiquidity to developed market country funds, and in particular whether they offer more stability during the period of the recent financial crisis. We find that country illiquidity plays a significant role in the premium of emerging market funds. However, in developed market funds country illiquidity is not significant. Fund illiquidity, in contrast, is significant for developed market funds but not for emerging market funds. The recent financial crisis has had a marked effect on the premium and illiquidity across both developed and emerging market funds, but emerging market funds seem to have recovered to pre-crisis levels more quickly than funds investing in developed markets.