Do hedge and merger arbitrage funds actually hedge? A time-varying volatility spillover approach

Spyros Papathanasiou, Dimitrios Vasiliou, Anastasios Magoutas and Drosos Koutsokostas

Finance Research Letters, 2022, vol. 44, issue C

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 (search for similar items in EconPapers)
JEL-codes: C32 C58 G11 G15 G34 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001690

DOI: 10.1016/j.frl.2021.102088

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