A test of risk arbitrage profitability

Branch, Ben S.; Yang, Taewon

doi:10.1016/j.irfa.2005.08.001

Cited by 6 publications

(7 citation statements)

References 11 publications

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“…The mean (median) number of positions is 36 (30). This survey result confirms the assumptions of diversification by Branch and Yang [2006] and Baker and Savasoglu [2002] in their respective papers. Consistent with this, in general, portfolios tend to be relatively diversified.…”

Section: Results Of the Survey Of Arbitrageurssupporting

confidence: 85%

The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Moore

Lai

Oppenheimer

2006

JAI

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T he focus on risk arbitrage in the finance literature has increased in recent years. The major issues have been the profitability of the risk arbitrage strategy, the relationship between the success of takeovers and the positions held by arbitrageurs, the supply of arbitrage capital and the overall role of arbitrageurs in the takeover process. To examine these issues or draw conclusions effectively, researchers need to understand the behavior of risk arbitrageurs.This article seeks to provide specific information about the role and behavior of risk arbitrageurs. This information can be used to examine the validity of some assumptions in the current literature and aid researchers in making valid assumptions in their future research.Until recently, very little has been known about the role of arbitrageurs and the inner workings of the risk arbitrage decision process. Therefore researchers have made various assumptions related to the role and behavior of risk arbitrageurs. For example, Mitchell and Pulvino [2001] made various assumptions about position limits and restrictions on the capital of arbitrageurs. In addition, the lack of knowledge of the behavior of risk arbitrageurs has given rise to various debates in the literature. For example, several researchers (e.g., Cornelli and Li [2002]) have hypothesized that sizable positions held by arbitrageurs contribute to the positive abnormal returns of the takeover. On the other hand, Larcker and Lys [1987] hypothesize that arbitrageurs earn abnormal returns by being better informed than the market about the probability of each deal's success. The results presented in this article will provide researchers with information on the activity of risk arbitrageurs in the marketplace. These results should help clarify a number of matters relevant to the topic.This article explores two related issues. First, the authors obtain private information on arbitrageur holdings in two takeover transactions from recent years. Most prior research has approximated the holdings of arbitrageurs by examining filings at the Securities and Exchange Commission (SEC). The authors obtain this data from a leading proxy solicitation firm. Second, in order to gain a better understanding of the process of arbitrage and the behavior of risk arbitrageurs, the authors report the results of a survey of a significant group of active arbitrageurs. The survey results provide insights on the risk arbitrageur activities during the merger/acquisition process.The article makes four contributions. First, the results provide the evidence about how quickly arbitrageurs become involved in the trading in securities involved in takeovers. Previous published research has made assumptions as to the speed of involvement of the risk arbitrage community.Second, the authors explore in the survey how arbitrageurs structure their portfolios and how they control risk within these portfolios.

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Section: Results Of the Survey Of Arbitrageurssupporting

confidence: 85%

The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Moore

Lai

Oppenheimer

2006

JAI

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“…It should also be noted that success or failure of an acquisition is not necessarily a definitive indication that returns will be substantially negative. Branch and Yang (2006a) report higher average returns associated with unsuccessful bids, compared to successful bids. In a separate paper specifically devoted to failed acquisition attempts (Branch and Yang, 2006b), the authors find that the relatively greater returns associated with unsuccessful cash offers is attributable to the high chance that these targets will receive a competing bid.…”

Section: Literature Reviewmentioning

confidence: 96%

“…, 1992; Schwert, 1996; Branch and Yang, 2003 1 ) and 4.8 per cent in a small sample study from Canada (Karolyi and Shannon, 1999). 2 For calendar‐time portfolios, estimates of mean annualised abnormal returns include 4.0, 7.3, 22.4 and 28.3 per cent in the United States (respectively, Mitchell and Pulvino, 2001; Baker and Savasoglu, 2002; Branch and Yang, 2006a; Jindra and Walkling, 2004), 8.1 per cent in the UK (Sudarsanam and Nguyen, 2008) and 10.6 per cent in Australia (Maheswaran and Yeoh, 2005).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Branch and Yang (2006a) measure the returns to risk arbitrage associated with different offer types, namely cash, stock swaps and collars, and different market conditions. A regression of excess portfolio returns on excess market returns implies monthly abnormal returns of 1.5 per cent for long‐only positions in targets subject to cash offers, 1.4 per cent for long‐short positions associated with stock swap offers, 2.0 per cent for long‐short positions associated with collar offers and 1.7 per cent in aggregate.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Rather than performing a piecewise linear regression analysis, Branch and Yang (2006a) separately analyse the subsample of observations during 20 months in which the market return was at least 3 per cent below the risk‐free rate. The authors find that their long‐only portfolios formed with respect to cash offers, and their long‐short portfolios formed with respect to collar offers and exhibit higher beta estimates during these down months, compared to estimates derived from the full sample.…”

Section: Literature Reviewmentioning

confidence: 99%

See 2 more Smart Citations

Market risk exposure of merger arbitrage in Australia

Hall

Pinnuck

Thorne

2011

Accounting & Finance

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We investigate the risk-return characteristics of merger arbitrage in the Australian market for corporate control, whereby hedge fund managers acquire companies subject to a takeover offer. On average, a strategy of buying target companies and short-selling bidders making scrip offers would have generated an annual return of 30 per cent from 1985 to 2008, excluding transaction costs, compared to the return on the broader market of 12 per cent. However, performance is not market neutral, being positively associated with market returns during downturns and inversely related to market movements during rising markets. The payoffs to this strategy are analogous to a short straddle, whereby the investor is short a call and put option at the same exercise price. These results are consistent with large-sample evidence from the United States and the United Kingdom and have not previously been documented in Australia, in which prior evidence is based only on cash deals during the 1990s.

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Notice of Retraction: Cash flow forecasting based on GA-BP model in valuation

Liu

2010

2010 IEEE International Conference on Advanced Management Science(ICAMS 2010)

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A test of risk arbitrage profitability

Cited by 6 publications

References 11 publications

The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Market risk exposure of merger arbitrage in Australia

Notice of Retraction: Cash flow forecasting based on GA-BP model in valuation

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