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1、THEJOURNALOFFINANCE·VOL.LVI,NO.6·DEC.2001CharacteristicsofRiskandReturninRiskArbitrageMARKMITCHELLandTODDPULVINO*ABSTRACTThispaperanalyzes4,750mergersfrom1963to1998tocharacterizetheriskandreturninriskarbitrage.Resultsindicatethatriskarbitragereturnsarepositivelycorrelatedwithma
2、rketreturnsinseverelydepreciatingmarketsbutuncorrelatedwithmarketreturnsinflatandappreciatingmarkets.Thissuggeststhatreturnstoriskarbitragearesimilartothoseobtainedfromsellinguncoveredindexputoptions.Usingacontingentclaimsanalysisthatcontrolsforthenonlinearrela-tionshipwithmark
3、etreturns,andaftercontrollingfortransactioncosts,wefindthatriskarbitragegeneratesexcessreturnsoffourpercentperyear.AFTERTHEANNOUNCEMENTOFAMERGERoracquisition,thetargetcompany'sstocktypicallytradesatadiscounttothepriceofferedbytheacquiringcompany.Thedifferencebetweenthetarget'ss
4、tockpriceandtheofferpriceisknownasthearbitragespread.Riskarbitrage,alsocalledmergerarbi-trage,referstoaninvestmentstrategythatattemptstoprofitfromthisspread.Ifthemergerissuccessful,thearbitrageurcapturesthearbitragespread.However,ifthemergerfails,thearbitrageurincursaloss,usual
5、lymuchgreaterthantheprofitsobtainedifthedealsucceeds.Inthispaper,weprovideestimatesofthereturnstoriskarbitrageinvestments,andwealsodescribetherisksassociatedwiththesereturns.Riskarbitragecommonlyinvokesimagesofextraordinaryprofitsandin-credibleimplosions.Numerousarticlesinthepo
6、pularpressdetaillargeprof-itsgeneratedbyfamousarbitrageurssuchasIvanBoeskyandevenlargerlossesbyhedgefundssuchasLongTermCapitalManagement.Overall,existingacademicstudiesfindthatriskarbitragegeneratessubstantialex-cessreturns.Forexample,Dukes,Frohlich,andMa~1992!andJindraandWalkl
7、ing~1999!focusoncashtenderoffersanddocumentannualexcessreturnsthatfarexceed100percent.KarolyiandShannon~1998!conclude*HarvardBusinessSchoolandKelloggSchoolofManagement,respectively.WearegratefultoseminarparticipantsattheCornellSummerFinanceConference,DukeUniversity,HarvardUnive
8、rsity,theUniversityofChicago,theUniversityofKansas,the
