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Cross Sectional Variation In Risk Arbitrage

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  • Jia Wang

Abstract

In this study, we are interested in understanding the price formation process of bidders’ and targets’ shares after the merger announcement and seek to explore the impacts of liquidity risk, price pressure, and limited arbitrage theory on the cross sectional variation in risk arbitrage. Using a sample of 1046 merger offers and regression technique, we find that arbitrage spread is positively correlated with deal completion risk, positively correlated with liquidity risk in a concave way: arbitrage spread increases at a decreasing speed as the liquidity risk increases. This finding is consistent with the literature on stock returns. We also find that price pressure is significant in determining arbitrage spread. However, we fail to find evidence that is consistent with the limited arbitrage theory: limitation on the supply of arbitrage capital is not significantly correlated with the deviation of arbitrage spread, in either direction, from the efficient level. The risk factors and limits of arbitrage identified in the paper help explain the profits and cross sectional variation in risk arbitrage

Suggested Citation

  • Jia Wang, 2017. "Cross Sectional Variation In Risk Arbitrage," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 11(1), pages 65-75.
    • Handle: RePEc:ibf:ijbfre:v:11:y:2017:i:1:p:65-75
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    More about this item

    Keywords

    Risk Arbitrage; Deal Completion Risk; Liquidity Risk; Price Pressure; Limited Arbitrage;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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