Risk Management for Event-Driven Funds

32 Pages Posted: 3 Oct 2007

See all articles by Philippe Jorion

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Date Written: September 2007


Many portfolio strategies are "event-driven," i.e., try to benefit from price movements caused by corporate events such as restructurings, bankruptcies, mergers, acquisitions, or other special situations. Such trading strategies involve payoffs that have discontinuous and skewed distributions that cannot be measured well with conventional risk methods. This paper develops methods to measure the forward-looking risk of portfolios exposed to such discrete events, based on current positions. When events are independent, the portfolio follows a binomial distribution. This approach is extended to the more realistic case where events are not independent. For mergers and acquisitions, empirical estimates of deal break correlations are positive but relatively low, which implies that most event risk is idiosyncratic and diversifiable. This methodology can be used to evaluate the risk and return of different portfolio structures.

Keywords: merger arbitrage, risk management, hedge funds, value at risk

JEL Classification: G11, G23, G32

Suggested Citation

Jorion, Philippe, Risk Management for Event-Driven Funds (September 2007). Available at SSRN: https://ssrn.com/abstract=1018281 or http://dx.doi.org/10.2139/ssrn.1018281

Philippe Jorion (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

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