The Shrinking Merger Arbitrage Spread: Reasons and Implications

Posted: 11 Mar 2009 Last revised: 2 Feb 2010

See all articles by Xinyu Ji

Xinyu Ji

Analysis Group, Inc.

Gaurav Jetley

Analysis Group, Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2009


In this study, we examine the evolution of the arbitrage spread between 1990 and 2007 and find that since 2002 the arbitrage spread has declined by over 400 basis points ("bps"). This decline is both economically and statistically significant. The decline in arbitrage spread corresponds with the decline in aggregate returns of M&A hedge funds as well as increased inflows into M&A hedge funds. We explore three possible explanations for the decline in arbitrage spread. Our study finds that a part of the decline in arbitrage spread may be explained by increased trading in the targets' stock subsequent to the merger announcement, reduced transaction costs, and changes in risk related to merger arbitrage. Our findings suggest some of the decline in arbitrage spread is likely to be permanent and thus investors seeking to invest in M&A hedge funds should focus on returns of the prospective funds since 2002 rather than returns over a longer period of time.

Keywords: alpha, hedge funds, arbitrage spread, merger arbitrage

JEL Classification: G11, G34

Suggested Citation

Ji, Xinyu and Jetley, Gaurav, The Shrinking Merger Arbitrage Spread: Reasons and Implications (March 5, 2009). Financial Analysts Journal, Vol. 66, No. 2, Available at SSRN:

Xinyu Ji

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

Gaurav Jetley (Contact Author)

Analysis Group, Inc. ( email )

Boston, MA
United States

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