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The risk arbitrage profitability and naive /passive indices: Cash tender offers, stock swap mergers and collar mergers

Taewon Yang, University of Massachusetts Amherst


In this dissertation, I explore the performance of risk arbitrage over 1990 to 1999 for three types of mergers: stock swap, cash tender and collar mergers. Furthermore, I construct passive/naïve indices for risk arbitrage strategies and test the indices. ^ In the performance analysis, I found: (i) Risk arbitrage generates lower returns and losses than an unhegded strategy for target stocks but higher returns and losses than the unhedged strategy for acquirer stocks. (ii) Changing exchange ratios may not always negatively affect the returns. (iii) Overall, successful mergers generate superior returns, compared with unsuccessful mergers. (iv) The inclusion of dividend and income on cash balances (derived from the short sales of the acquirer's shares) added moderately to the computed returns. (v) Time weighted annualized returns are different from equal weighted annualized returns.^ In the passive/naïve indices analyses, I found: (i) Risk arbitrage produces higher risk adjusted returns than unhedged strategies. (ii) In risk arbitrage, the stock swap index shows the highest risk adjusted returns. The highest volatility in cash tender offer positions causes a risk arbitrage strategy to produce the lowest risk adjusted returns. (iii) On average, active indices generate the best risk adjusted returns among indices. (iv) Passive/naive risk arbitrage indices have low and negative betas. These negative systematic risk levels are due to the presence of higher systematic risks for acquirer indices compared with those of target indices. (v) Active indices have low and positive systematic risks. And they have a positive relationship with unhegded strategies. These results imply that the active indices tend to be partially hedged. ^

Subject Area


Recommended Citation

Yang, Taewon, "The risk arbitrage profitability and naive /passive indices: Cash tender offers, stock swap mergers and collar mergers" (2002). Doctoral Dissertations Available from Proquest. AAI3068601.