An Option-Based Approach to Risk Arbitrage in Emerging Markets: Evidence from Taiwan Takeover Attempts
Article first published online: 22 NOV 2012
Copyright © 2012 John Wiley & Sons, Ltd.
Journal of Forecasting
How to Cite
Lin, L., Lan, L.-H. and Chuang, S.-s. (2012), An Option-Based Approach to Risk Arbitrage in Emerging Markets: Evidence from Taiwan Takeover Attempts. J. Forecast.. doi: 10.1002/for.2250
- Article first published online: 22 NOV 2012
- Manuscript Accepted: 27 JUL 2012
- Manuscript Revised: 29 MAY 2012
- Manuscript Received: 15 SEP 2010
- risk arbitrage;
- exchange option model;
- takeover attempts
Predicting the accuracy rate of takeover completion is the major key to risk arbitrage returns. In emerging markets, data on takeover attempts are either unavailable or of poor quality. Therefore, this paper proposes an option-based approach to improve the accuracy of prediction. Empirical research on Taiwan takeovers shows that by this approach, the accuracy rate is 71.15%—considerably higher than the average of 54.81% using qualitative models. There exist, on average, three opportunities to close arbitrage positions, at a time before completion dates, when the target and acquiring stock prices converge. The annualized abnormal return is 42.19% greater than it would otherwise be. Copyright © 2012 John Wiley & Sons, Ltd.