Premium
An Option‐Based Approach to Risk Arbitrage in Emerging Markets: Evidence from Taiwan Takeover Attempts
Author(s) -
Lin Luke,
Lan LiHuei,
Chuang Shuangshii
Publication year - 2013
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2250
Subject(s) - arbitrage , stock (firearms) , econometrics , financial economics , economics , key (lock) , quality (philosophy) , statistical arbitrage , empirical evidence , emerging markets , risk arbitrage , actuarial science , computer science , arbitrage pricing theory , finance , capital asset pricing model , engineering , mechanical engineering , philosophy , computer security , epistemology
Predicting the accuracy rate of takeover completion is the major key to risk arbitrage returns. In emerging markets, data on takeover attempts are either unavailable or of poor quality. Therefore, this paper proposes an option‐based approach to improve the accuracy of prediction. Empirical research on Taiwan takeovers shows that by this approach, the accuracy rate is 71.15%—considerably higher than the average of 54.81% using qualitative models. There exist, on average, three opportunities to close arbitrage positions, at a time before completion dates, when the target and acquiring stock prices converge. The annualized abnormal return is 42.19% greater than it would otherwise be. Copyright © 2012 John Wiley & Sons, Ltd.