IDEAS home Printed from https://ideas.repec.org/a/oup/jfinec/v21y2023i1p145-186..html
   My bibliography  Save this article

Option Prices and the Probability of Success of Cash Mergers

Author

Listed:
  • C Alan Bester
  • Victor H Martinez
  • Ioanid Roşu

Abstract

We study both theoretically and empirically option prices on firms undergoing a cash merger offer. To estimate the merger’s success probability, we use a Markov Chain Monte Carlo (MCMC) method using a state space representation of our model. Our estimated probability measure has significant predictive power for the merger outcome even after controlling for variables used in the merger literature. As predicted by the model, a graph of the target firm’s implied volatility against the strike price has a kink at the offer price, and the kink’s magnitude is proportional to the merger’s success probability.

Suggested Citation

  • C Alan Bester & Victor H Martinez & Ioanid Roşu, 2023. "Option Prices and the Probability of Success of Cash Mergers," Journal of Financial Econometrics, Oxford University Press, vol. 21(1), pages 145-186.
    • Handle: RePEc:oup:jfinec:v:21:y:2023:i:1:p:145-186.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/jjfinec/nbaa048
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    : Black and Scholes formula; fallback price; implied volatility curve; Markov Chain Monte Carlo; mergers and acquisitions; success probability; volatility smile;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:jfinec:v:21:y:2023:i:1:p:145-186.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sofieea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.