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Risk arbitrage : analysis and trading systems

Author(s)
Naheta, Akshay, 1981-
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Massachusetts Institute of Technology. Dept. of Electrical Engineering and Computer Science.
Advisor
Leonid Kogan and John Tsitsiklis.
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M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission. http://dspace.mit.edu/handle/1721.1/7582
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Abstract
In this thesis we quantify the risk arbitrage investment process and create trading strategies that generate positive risk-adjusted returns. We use a sample of 895 stock swap mergers, cash mergers, and cash tender offers during 1998-2004Q2. We test the market efficiency hypothesis, and after accounting for transaction costs, we find that our risk arbitrage strategies generate annual risk-adjusted returns in excess of 4.5%. The research also obtains various other merger statistics, and relates them to a variety of economic indicators and merger timing models, as described in past work. We also estimate conditional probabilities of a merger's success, using a deal characteristic-driven prediction model, and combine it with market-implied probabilities. Our analysis suggests that the probability of success of a merger depends on a deal's characteristics. Further, it implies that one can improve on the market-implied estimates thereby creating trading opportunities. The analytical results achieved in this thesis can be used as the foundation for building an effective risk arbitrage trading platform.
Description
Thesis (S.M.)--Massachusetts Institute of Technology, Dept. of Electrical Engineering and Computer Science, 2004.
 
Includes bibliographical references (leaves 59-60).
 
Date issued
2004
URI
http://hdl.handle.net/1721.1/28738
Department
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
Publisher
Massachusetts Institute of Technology
Keywords
Electrical Engineering and Computer Science.

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