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Markov-switching in target stocks during takeover bids

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  • 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.

Suggested Citation

  • Gelman, Sergey & Wilfling, Bernd, 2009. "Markov-switching in target stocks during takeover bids," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 745-758, December.
  • Handle: RePEc:eee:empfin:v:16:y:2009:i:5:p:745-758
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    References listed on IDEAS

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    Cited by:

    1. Luca De Angelis & Leonard J. Paas, 2013. "A dynamic analysis of stock markets using a hidden Markov model," Journal of Applied Statistics, Taylor & Francis Journals, vol. 40(8), pages 1682-1700, August.
    2. Lien Duong, 2013. "Aggregate Australian Takeovers: A Review of Markov Regime Switching Models," International Review of Finance, International Review of Finance Ltd., vol. 13(4), pages 529-558, December.
    3. Meulemann, Max & Uebele, Martin & Wilfling, Bernd, 2014. "The restoration of the gold standard after the US Civil War: A volatility analysis," Journal of Financial Stability, Elsevier, vol. 12(C), pages 37-46.
    4. 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.
    5. Al-Anaswah, Nael & Wilfling, Bernd, 2011. "Identification of speculative bubbles using state-space models with Markov-switching," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1073-1086, May.
    6. Carroll, Rachael & Kearney, Colm, 2015. "Testing the mixture of distributions hypothesis on target stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 1-14.

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