A profitable trading rule using mean reverting investment trusts discounts

Abstract

This paper makes use of the finding that discounts of individual investment trust shares are mean reverting to their sector mean. This suggests limits to the degree to which individual shares in a sector can vary in price behaviour before competitive pressures bring individual shares back into line. Hence a buy low-sell high strategy can be constructed and its performance compared to an market index based on an equal weight portfolio of all shares in a sector. Such a stratagy outperforms the market index for the two main, conventional investment trust sectors for the sample period 1976–1995.