Switching Volatility in Target Stocks During Takeover Bids

32 Pages Posted: 13 Feb 2007

See all articles by Sergey Gelman

Sergey Gelman

University of Muenster - Faculty of Economics; National Research University Higher School of Economics

Bernd Wilfling

Westfälische Wilhelms-Universität

Date Written: January 10, 2007

Abstract

This paper examines movements in the conditional volatility of stock prices of takeover targets. Based on a continuous-time modelling framework, we provide theoretical justification for modelling the data-generating process of the target stock price as subject to volatility regime-switching. Using daily stock prices of five European and American targets, we find that adequately specified Markov-switching GARCH models are capable of detecting statistically significant volatility regime-switches in all takeover deal-types (in cash bids, pure share-exchange bids, mixed bids). Overall, volatility regime-switches are found to be most clear-cut for cash bids. Our econometric findings have implications for a broad range of financial applications such as the valuation of target stock options.

Keywords: Takeover bids, stock price dynamics, volatility regime-switching models

JEL Classification: C32, C52, G12, G14, G34

Suggested Citation

Gelman, Sergey and Wilfling, Bernd, Switching Volatility in Target Stocks During Takeover Bids (January 10, 2007). Available at SSRN: https://ssrn.com/abstract=962885 or http://dx.doi.org/10.2139/ssrn.962885

Sergey Gelman

University of Muenster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

National Research University Higher School of Economics

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Bernd Wilfling (Contact Author)

Westfälische Wilhelms-Universität ( email )

Professur für Empirische Wirtschaftsforschung
Am Stadtgraben 9
Münster, 48143
Germany
+49 - 251 - 83 25040 (Phone)
+49 - 251 - 83 25042 (Fax)

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