Risk arbitrage : analysis and trading systems
Author(s)Naheta, Akshay, 1981-
Massachusetts Institute of Technology. Dept. of Electrical Engineering and Computer Science.
Leonid Kogan and John Tsitsiklis.
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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.
Thesis (S.M.)--Massachusetts Institute of Technology, Dept. of Electrical Engineering and Computer Science, 2004.Includes bibliographical references (leaves 59-60).
DepartmentMassachusetts Institute of Technology. Dept. of Electrical Engineering and Computer Science.
Massachusetts Institute of Technology
Electrical Engineering and Computer Science.