Characteristics of Risk and Return in Risk Arbitrage


  • Mark Mitchell,

  • Todd Pulvino

  • * Harvard Business School and Kellogg School of Management, respectively. We are grateful to seminar participants at the Cornell Summer Finance Conference, Duke University, Harvard University, the University of Chicago, the University of Kansas, the New York Federal Reserve Bank, the University of North Carolina, Northwestern University, the University of Rochester, and the University of Wisconsin-Madison for helpful comments, and to three anonymous referees, Malcolm Baker, Bill Breen, Emil Dabora, Kent Daniel, Bob Korajczyk, Mitchell Petersen, Judy Posnikoff, Mark Seasholes, Andrei Shleifer, Erik Stafford, René Stulz, Vefa Tarhan, and especially Ravi Jagannathan for helpful discussions. We would also like to thank the many active arbitrageurs who have advanced our understanding of risk arbitrage.


This paper analyzes 4,750 mergers from 1963 to 1998 to characterize the risk and return in risk arbitrage. Results indicate that risk arbitrage returns are positively correlated with market returns in severely depreciating markets but uncorrelated with market returns in flat and appreciating markets. This suggests that returns to risk arbitrage are similar to those obtained from selling uncovered index put options. Using a contingent claims analysis that controls for the nonlinear relationship with market returns, and after controlling for transaction costs, we find that risk arbitrage generates excess returns of four percent per year.