Extensions of the Merger Arbitrage Risk Model

13 Pages Posted: 6 Feb 2010

See all articles by Stéphane Daul

Stéphane Daul

Pictet Asset Management; affiliation not provided to SSRN

Date Written: February 1, 2008


A traditional VaR approach is not suitable to assess the risk of merger arbitrage hedge funds. We recently proposed a simple two- or three-state model that captures the risk characteristics of the deals in which merger arbitrage funds invest. Here, we refine the model, and demonstrate that it captures merger and acquisition risk characteristics using over 4000 historical deals. We then measure the risk of a realistic sample portfolio. The risk measures that we obtain are consistent with those of actual hedge funds. Finally, we present a statistical model for the probability of success and show that we beat the market in an out-of-sample study, suggesting that there is a potential “alpha” for merger arbitrage hedge funds.

Keywords: Merger arbitrage, risk measurement

JEL Classification: C

Suggested Citation

Daul, Stéphane and Daul, Stéphane, Extensions of the Merger Arbitrage Risk Model (February 1, 2008). Available at SSRN: https://ssrn.com/abstract=1548411 or http://dx.doi.org/10.2139/ssrn.1548411

Stéphane Daul (Contact Author)

affiliation not provided to SSRN

Pictet Asset Management ( email )


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