An Option‐Based Approach to Risk Arbitrage in Emerging Markets: Evidence from Taiwan Takeover Attempts. (22nd November 2012)

• Record Type: Journal Article
• Authors: Lin, Luke; Lan, Li‐Huei; Chuang, Shuang‐shii
• Is Part Of: Journal of forecasting. Volume 32:Number 6(2013:Sep.)
• Page Start: 512
• Page End: 521
• Publication Date: 2012-11-22
• Subjects: risk arbitrage -- exchange option model -- takeover attempts; Forecasting -- Periodicals; Forecasting -- Mathematical models -- Periodicals; 003.2
• DOI: 10.1002/for.2250
• Languages: English
• ISSNs: 0277-6693

Abstract

ABSTRACT: 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.