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Markov-switching in target stocks during takeover bids

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Author Info

  • Gelman, Sergey
  • Wilfling, Bernd

Abstract

This paper examines shifts in the market betas and the conditional volatility of stock prices of takeover targets. Using daily stock prices of five European and American targets, we find that adequately specified Markov-switching GARCH models are capable of detecting statistically significant regime-switches in all takeover deal-types (in cash bids, pure share-exchange bids, mixed bids). In particular, conditional volatility regime-switches are found to be most clear-cut for cash bids. Our econometric findings have implications for a broad range of financial applications such as the valuation of target stock options.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 5 (December)
Pages: 745-758

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Handle: RePEc:eee:empfin:v:16:y:2009:i:5:p:745-758

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Takeover bids Stock price dynamics Markov-switching models;

References

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  1. Bhagat, Sanjai & Brickley, James A & Loewenstein, Uri, 1987. " The Pricing Effects of Interfirm Cash Tender Offers," Journal of Finance, American Finance Association, vol. 42(4), pages 965-86, September.
  2. Bollen, Nicolas P. B. & Gray, Stephen F. & Whaley, Robert E., 2000. "Regime switching in foreign exchange rates: Evidence from currency option prices," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 239-276.
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  4. BAUWENS, Luc & PREMINGER, Arie & ROMBOUTS, Jeroen VK, . "Theory and inference for a Markov switching Garch model," CORE Discussion Papers RP -2303, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Hutson, Elaine & Kearney, Colm, 2001. "Volatility in stocks subject to takeover bids: Australian evidence using daily data," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 273-296, July.
  6. Jarrell, Gregg A & Brickley, James A & Netter, Jeffry M, 1988. "The Market for Corporate Control: The Empirical Evidence Since 1980," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 49-68, Winter.
  7. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  8. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  9. Michael Dueker, 1995. "Markov switching in GARCH processes and mean reverting stock market volatility," Working Papers 1994-015, Federal Reserve Bank of St. Louis.
  10. Samuelson, William & Rosenthal, Leonard, 1986. " Price Movements as Indicators of Tender Offer Success," Journal of Finance, American Finance Association, vol. 41(2), pages 481-99, June.
  11. Schwert, G. William, 1996. "Markup pricing in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 41(2), pages 153-192, June.
  12. René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
  13. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
  14. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  15. Franc Klaassen, 2002. "Improving GARCH volatility forecasts with regime-switching GARCH," Empirical Economics, Springer, vol. 27(2), pages 363-394.
  16. Ajay Subramanian, 2004. "Option Pricing on Stocks in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 59(2), pages 795-829, 04.
  17. Markus Haas, 2004. "A New Approach to Markov-Switching GARCH Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 493-530.
  18. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
  19. Wilfling, Bernd & Maennig, Wolfgang, 2001. "Exchange rate dynamics in anticipation of time-contingent regime switching: modelling the effects of a possible delay," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 91-113, February.
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Citations

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Cited by:
  1. Yuan, Chunming, 2011. "Forecasting exchange rates: The multi-state Markov-switching model with smoothing," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 342-362, April.
  2. Max Meulemann & Martin Uebele & Bernd Wilfling, 2012. "The Restoration of the Gold Standard after the US Civil War: A Volatility Analysis," Global COE Hi-Stat Discussion Paper Series gd12-251, Institute of Economic Research, Hitotsubashi University.
  3. Nael Al-Anaswah & Bernd Wilfling, 2009. "Identification of speculative bubbles using state-space models with Markov-switching," CQE Working Papers 0309, Center for Quantitative Economics (CQE), University of Muenster.

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