Merger Arbitrage Excess Returns On The European Market

Risk arbitrage is a stock-buying practice that seeks to capitalize on the price difference between the current market value of a security and its value following a successful takeover,merger,acquisitions,spin-off or other forms of corporate reorganizations.It is a strategy that seeks to extract abnormal returns from the merger and acquisition activity.It is a commonly used strategy by hedge funds and many other institutional investors.As the risk arbitrage is so attractive to all the investors and scholars,many academic researches based on it have been done in the past twenty years.As long as a topic is discussed and researched,the controversy ideas would definitely be existed.All the scholars and hedge fund managers have focused on one point that the profitability of the merger arbitrage. Two different voices can be found in the discussing process.Many previous studies have shown high expected abnormal returns from this kind of strategy which totally violate the Efficient Market Hypothesis(EMH).However,recent researches have pointed out that the profitability of such a strategy is declining. Most previous studies are based on US market and Canadian market.This paper tries to examine the profitability in risk arbitrage portfolio on the European market which is also efficient enough to get ride of abnormal return,by contrast. By using the event-time approach and calendar-time approach to measure the return on the risk arbitrage portfolio,the findings show that the returns from such strategies are not significant.After adjusting the risk,the abnormal return (alpha) in fact proves to be negative.Although,the risk arbitrage portfolio sounds like a free lunch,the lunch does not exist.There are many reasons causing the phenomenon coming from the acquiring company,the restrictions on the market,the market efficiency and the capacity of the investors.