Merger Arbitrage and Idiosyncratic Risk

Shepherd, Shane D.

Abstract

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Merger Arbitrage and Idiosyncratic Risk

Shane D. Shepherd

Research Affiliates, LLC

October 13, 2009

Review of Business Research, Forthcoming

Abstract:
This paper identifies a merger arbitrage risk factor that is superior to market beta in explaining the risks assumed by a merger arbitrage portfolio. Previous research has documented a weak tie between market beta and merger arbitrage returns. Mitchell and Pulvino (2002), for example, note that the beta to a merger arbitrage strategy appear to be nonlinear; they are close to zero in a flat to rising market but large in a falling market. However, when our risk factor is added to market beta in a two-factor risk model, the resulting beta cannot be statistically distinguished from zero in all market conditions.

Number of Pages in PDF File: 7

Keywords: mergers, risk arbitrage

JEL Classification: G12, G34

Accepted Paper Series

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Date posted: October 13, 2009

Suggested Citation

Shepherd, Shane D., Merger Arbitrage and Idiosyncratic Risk (October 13, 2009). Review of Business Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1488415

Contact Information

Shane D. Shepherd (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Drive
Suite 900
Newport Beach, CA 92660
United States