Closed-end country funds and the role of exchange rates in pricing and in determination of premiums and discounts

This paper investigates the relationships between fund returns and exchange rates and between premiums/discounts and exchange rates for European closed-end country funds over the period 1992 through 2003. It focuses on the effects of the adoption of the Euro and its exchange rate implications for the pricing behavior of Euroland country funds. Significant effects are found: fund returns are most affected by exchange rate returns while premiums/discounts are most affected by volatility of exchange rate returns. In general, a depreciation of the local currency (a strengthening of the U.S. dollar) decreases fund returns more after the adoption of the Euro than before. However, introduction of the Euro reduced volatility impacts on premiums/discounts. Thus, it appears that U.S. investors, in a portfolio context, gained from weakened volatility effects but lost from intensified effects of exchange rate changes.