Merger Options and Risk Arbitrage

57 Pages Posted: 20 Jan 2016 Last revised: 11 Nov 2017

See all articles by Peter Van Tassel

Peter Van Tassel

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: 2016-01-01


Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio when deals are likely to succeed.

Keywords: financial economics, option pricing, mergers and acquisitions

JEL Classification: G00, G12, G34

Suggested Citation

Van Tassel, Peter, Merger Options and Risk Arbitrage (2016-01-01). FRB of NY Staff Report No. 761. Available at SSRN:

Peter Van Tassel (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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