Do Hedge and Merger Arbitrage Funds Actually Hedge? A Time-Varying Volatility Spillover Approach

Posted: 3 May 2021

See all articles by Spyros Papathanasiou

Spyros Papathanasiou

National and Kapodistrian University of Athens

Dimitrios Vasiliou

National and Kapodistrian University of Athens

Anastasios Magoutas

Hellenic Open University; National and Kapodistrian University of Athens - School of Economics & Political Science

Drosos Koutsokostas

National and Kapodistrian University of Athens

Date Written: April 27, 2021

Abstract

We examine the interaction between funds implementing hedge and merger arbitrage strategies and a set of traditional assets comprising equities, bonds, gold, crude oil, currency, commodities and real estate, by applying a time-varying spillover approach for the period 1/1/2010-7/31/2020. Results indicate that the funds absorb the fewest shocks from equities, crude oil, gold and currency compared to commodities, bonds and real estate. Furthermore, we test the effective hedging ability of these funds by estimating hedge ratios and optimal portfolio weights. Taking a short position in the volatility of the funds provides impeccable hedging effectiveness for all asset classes, except currency.

Keywords: Alternative investments, Connectedness, Hedge replication, Merger arbitrage, Portfolio diversification COVID-19

JEL Classification: C32, C58, G11, G15, G34

Suggested Citation

Papathanasiou, Spyros and Vasiliou, Dimitrios and Magoutas, Anastasios and Koutsokostas, Drosos, Do Hedge and Merger Arbitrage Funds Actually Hedge? A Time-Varying Volatility Spillover Approach (April 27, 2021). Finance Research Letters, Vol. 102088, 2021, Available at SSRN: https://ssrn.com/abstract=3837860

Spyros Papathanasiou (Contact Author)

National and Kapodistrian University of Athens ( email )

1, Sofokleous Str.
Athens, 10559
Greece

Dimitrios Vasiliou

National and Kapodistrian University of Athens ( email )

Athenes
Greece
0030 210 3689486 (Phone)

Anastasios Magoutas

Hellenic Open University ( email )

Parodos Aristotelous 18
Patra, 26335
Greece

National and Kapodistrian University of Athens - School of Economics & Political Science ( email )

Athens
Greece

Drosos Koutsokostas

National and Kapodistrian University of Athens ( email )

5 Stadiou Strt
Athens, 12131
Greece
10679 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
103
PlumX Metrics