Risk and return of the merger arbitrage strategy in the European market
Master thesis
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Date
2022Metadata
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- Master of Science [1684]
Abstract
In this thesis we have created a European merger arbitrage index consisting of 786
cash, stock, and combination deals from 2000 to 2022. Three portfolios have been
created; equaly-weighted, value-weighted, and a practitioner portfolio. The portfolios
have been benchmarked against CAPM, Fama and French’s (1993, 2015) three- and
five-factor model. The monthly excess risk-adjusted returns range between 1.15% and
2.33%, while the market beta is between 0.1945 and 0.3843. Both alphas and market
betas are statistically significant at any conventional levels. This implies that merger
arbitrage is not a market-neutral strategy. A piecewise linear regression has also been
conducted. We found some evidence suggesting that the strategy becomes highly correlated
with the market during downturns, with a market beta between 1.1 and 1.56
while maintaining a market beta of 0.175 to 0.304 the rest of the time.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2022