This paper examines the profitability of option-based merger arbitrage. A simple arbitrage strategy using stock options is designed to examine the merger arbitrage profitability from 1996 to 2008. This strategy takes long position on call options of target firms and put options of acquirer firms simultaneously. The results show that the option-based arbitrage strategy is far more profitable than the stock-based arbitrage strategy. Option arbitrage grows one dollar invested in merger deals in January 1996 into more than seventeen dollars by December 2008. In contrast, stock arbitrage grows one dollar into approximately seven dollars over the same period. It is also observed that both the strategies generate significant arbitrage portfolio returns that are robust to controls of traditional asset pricing factors.
{"title":"Profitability of Option-Based Merger Arbitrage","authors":"Xuewu Wang, Lei Wedge","doi":"10.2139/ssrn.1685284","DOIUrl":"https://doi.org/10.2139/ssrn.1685284","url":null,"abstract":"This paper examines the profitability of option-based merger arbitrage. A simple arbitrage strategy using stock options is designed to examine the merger arbitrage profitability from 1996 to 2008. This strategy takes long position on call options of target firms and put options of acquirer firms simultaneously. The results show that the option-based arbitrage strategy is far more profitable than the stock-based arbitrage strategy. Option arbitrage grows one dollar invested in merger deals in January 1996 into more than seventeen dollars by December 2008. In contrast, stock arbitrage grows one dollar into approximately seven dollars over the same period. It is also observed that both the strategies generate significant arbitrage portfolio returns that are robust to controls of traditional asset pricing factors.","PeriodicalId":113043,"journal":{"name":"The IUP Journal of Applied Finance","volume":"203 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116614772","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The present study attempts to examine the random movements in stock indices in the Indian equity market. It tests the random walk hypotheses in daily, weekly and monthly returns of six Indian stock market indices from January 2000 to October 2009. The indices considered for the purpose of the study include Nifty, CNX Nifty Junior, NSE 500, SENSEX, BSE 100 and BSE 500. The study uses Jarque-Bera (JB) Test for testing normality in return series. It also applies Box Pierce Q-Statistics and Ljung-Box (LB)statistics, and Augmented Dickey-Fuller (ADF) test to test whether return series follow random walk or not. The results indicate that there are no random movements in share indices. However, when we apply Lo and MacKinlay (1988) variance ratio test under the assumptions of both homoskedasticity and heteroskedasticity, we observe contradictory results. It is also found that sometimes heteroskedasticity is the source of non-random behavior in share indices.
{"title":"Testing the Random Walk Model in Indian Stock Markets","authors":"Vdmv Lakshmi, B. Roy","doi":"10.2139/ssrn.1895114","DOIUrl":"https://doi.org/10.2139/ssrn.1895114","url":null,"abstract":"The present study attempts to examine the random movements in stock indices in the Indian equity market. It tests the random walk hypotheses in daily, weekly and monthly returns of six Indian stock market indices from January 2000 to October 2009. The indices considered for the purpose of the study include Nifty, CNX Nifty Junior, NSE 500, SENSEX, BSE 100 and BSE 500. The study uses Jarque-Bera (JB) Test for testing normality in return series. It also applies Box Pierce Q-Statistics and Ljung-Box (LB)statistics, and Augmented Dickey-Fuller (ADF) test to test whether return series follow random walk or not. The results indicate that there are no random movements in share indices. However, when we apply Lo and MacKinlay (1988) variance ratio test under the assumptions of both homoskedasticity and heteroskedasticity, we observe contradictory results. It is also found that sometimes heteroskedasticity is the source of non-random behavior in share indices.","PeriodicalId":113043,"journal":{"name":"The IUP Journal of Applied Finance","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114975199","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
B. Balachandran, Vineeta Harshad. Juthani, M. Mahamuni, Berty Vidanapathirana
This paper provides an analysis of the relationship between final dividend reductions and price reactions around final dividend reduction announcements. The authors argue that final dividend reductions provide strong signals when they are not fully anticipated, while the price reaction is weaker when the market anticipates a reduction in the final dividend. Price reactions are dependent upon the size of final dividend reduction, the gearing ratio and prior dividend reduction. In addition, the authors find that the gearing ratio, company size, lagged earnings and current earnings change have explanatory power for the decision to determine whether to reduce annual dividend at both interim and final stages or only at the final stage.
{"title":"Price Reaction, Final Dividend Reductions and Signaling: UK Evidence","authors":"B. Balachandran, Vineeta Harshad. Juthani, M. Mahamuni, Berty Vidanapathirana","doi":"10.2139/ssrn.1535206","DOIUrl":"https://doi.org/10.2139/ssrn.1535206","url":null,"abstract":"This paper provides an analysis of the relationship between final dividend reductions and price reactions around final dividend reduction announcements. The authors argue that final dividend reductions provide strong signals when they are not fully anticipated, while the price reaction is weaker when the market anticipates a reduction in the final dividend. Price reactions are dependent upon the size of final dividend reduction, the gearing ratio and prior dividend reduction. In addition, the authors find that the gearing ratio, company size, lagged earnings and current earnings change have explanatory power for the decision to determine whether to reduce annual dividend at both interim and final stages or only at the final stage.","PeriodicalId":113043,"journal":{"name":"The IUP Journal of Applied Finance","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116931707","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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