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The Journal of Alternative Investments

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Primary Article

Risk-Arbitrage Spreads and Performance of Risk Arbitrage

Ben S Branch and Jia Wang
The Journal of Alternative Investments Summer 2008, 11 (1) 9-22; DOI: https://doi.org/10.3905/jai.2008.708847
Ben S Branch
A professor of finance at the University of Massachusetts in Amherst.
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  • For correspondence: branchb@som.umass.edu
Jia Wang
An assistant professor of finance at Rowan University in Glassboro, NJ.
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  • For correspondence: wangji@rowan.edu
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Abstract

This article explores the cross sectional variation in risk arbitrage spreads. Factors that are relevant to the probability of deal success (i.e., target termination fees, target resistance, target price run-up, relative size of the target, and arbitrageurs' activity), bid revision (i.e., target's growth opportunity), potential loss when a deal fails (i.e., bid premium and bidder's systematic risk) and transaction costs for risk arbitrageurs (i.e., bidder's return volatility and low priced shares) are found to be significant in developing a prediction model for risk arbitrage spreads. Risk arbitrage portfolios are created by comparing predicted arbitrage spreads with actual arbitrage spreads. The results show that deals whose actual spreads exceed the predicted spreads tend to be more attractive investments. The model may be used by risk arbitrageurs to identify attractive risk arbitrage opportunities.

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The Journal of Alternative Investments
Vol. 11, Issue 1
Summer 2008
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Risk-Arbitrage Spreads and Performance of Risk Arbitrage
Ben S Branch, Jia Wang
The Journal of Alternative Investments Jun 2008, 11 (1) 9-22; DOI: 10.3905/jai.2008.708847

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Risk-Arbitrage Spreads and Performance of Risk Arbitrage
Ben S Branch, Jia Wang
The Journal of Alternative Investments Jun 2008, 11 (1) 9-22; DOI: 10.3905/jai.2008.708847
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