Risk Arbitrage

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.

Pairs trading is one of many profitable trading strategies which exist in the stock market. In our term paper we examine the statistical and the risk arbitrage opportunity. At the beginning conventional pairs trading is very profitable. But as we will see, we will come to a point where it is not possible anymore to follow this strategy. Thus we will implement a modified strategy which withstand unexpected occurrences – like the impact of a merger and other fundamental changes between the two stocks. Indeed, this strategy will generate on the one hand a lower profit and is also riskier but can always be continued without a big research effort.effort. Since the profit is too small in total of the modified method we will improve this modified strategy by a measure which execute orders faster and leads to an improvement of $18,26 at the end. At the end we will also show possibilities how to realize pairs trading with financial products.