Noise-trader risk: does it deter arbitrage, and is it priced?

Arbitrage positions that benefit from the reversion of closed-end fund discounts to rational levels show excess returns that increase in magnitude the more funds are mispriced. At the same time, fund trading volumes and bid-ask spreads more than double as funds become increasingly mispriced. These behaviors suggest that non-diversifiable noise-trader risk increases the more funds are mispriced and that market participants are not only aware of this unique risk factor but demand a compensatory rate of return that varies with its magnitude.