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Do hedge and merger arbitrage funds actually hedge? A time-varying volatility spillover approach

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  • Papathanasiou, Spyros
  • Vasiliou, Dimitrios
  • Magoutas, Anastasios
  • Koutsokostas, Drosos

Abstract

We examine the interaction between funds implementing hedge and merger arbitrage strategies and a set of traditional assets comprising equities, bonds, gold, crude oil, currency, commodities and real estate, by applying a time-varying spillover approach for the period 1/1/2010-7/31/2020. Results indicate that the funds absorb the fewest shocks from equities, crude oil, gold and currency compared to commodities, bonds and real estate. Furthermore, we test the effective hedging ability of these funds by estimating hedge ratios and optimal portfolio weights. Taking a short position in the volatility of the funds provides impeccable hedging effectiveness for all asset classes, except currency.

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  • Papathanasiou, Spyros & Vasiliou, Dimitrios & Magoutas, Anastasios & Koutsokostas, Drosos, 2022. "Do hedge and merger arbitrage funds actually hedge? A time-varying volatility spillover approach," Finance Research Letters, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001690
    DOI: 10.1016/j.frl.2021.102088
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    Cited by:

    1. Bikramaditya Ghosh & Spyros Papathanasiou & Vandita Dar & Konstantinos Gravas, 2022. "Bubble in Carbon Credits during COVID-19: Financial Instability or Positive Impact (“Minsky” or “Social”)?," JRFM, MDPI, vol. 15(8), pages 1-16, August.
    2. Adriana AnaMaria Davidescu & Eduard Mihai Manta & Razvan Gabriel Hapau & Mihaela Gruiescu & Oana Mihaela Vacaru (Boita), 2023. "Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets," Mathematics, MDPI, vol. 11(3), pages 1-50, January.
    3. Spyros Papathanasiou & Dimitris Kenourgios & Drosos Koutsokostas & Georgios Pergeris, 2023. "Can treasury inflation-protected securities safeguard investors from outward risk spillovers? A portfolio hedging strategy through the prism of COVID-19," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 198-211, May.
    4. Papathanasiou, Spyros & Dokas, Ioannis & Koutsokostas, Drosos, 2022. "Value investing versus other investment strategies: A volatility spillover approach and portfolio hedging strategies for investors," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    5. Karkowska, Renata & Urjasz, Szczepan, 2023. "How does the Russian-Ukrainian war change connectedness and hedging opportunities? Comparison between dirty and clean energy markets versus global stock indices," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    6. Umar, Zaghum & Polat, Onur & Choi, Sun-Yong & Teplova, Tamara, 2022. "Dynamic connectedness between non-fungible tokens, decentralized finance, and conventional financial assets in a time-frequency framework," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    Alternative investments; Connectedness; Hedge replication; Merger arbitrage; Portfolio diversification; COVID-19;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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