Takeover Trading Strategies: Is Risk Arbitrage and Reverse Risk Arbitrage Profitable In Europe?

Abstract: This thesis examines the profitability of passive Risk Arbitrage and semi-active Reverse Risk Arbitrage strategies on a sample of 212 cash takeovers in the European market from June 1997 to December 2005. Benchmarking the risk arbitrage portfolios against the CAPM, we find that risk arbitrage generates significant monthly abnormal returns ranging from 2.27% to 3.24%. Moreover, we find that risk arbitrage portfolios in Europe constructed based on an expected return model developed by Wang, J. (2009), improves the performance of the strategy. Contrary to our expectations, our results show that reverse risk arbitrage strategies based on 1) an adjusted expected return model and 2) target resistance as predictor for takeover failure, are not profitable in Europe.