![]() When we analyze historical returns, kurtosis can help us to gauge an assets' level of risk. We can also tell that this distribution follows a leptokurtic distribution which happens when the points along the X-axis are clustered resulting in higher peak(higher kurtosis) than the curvature found n a normal distribution. We can look at the corresponding intercept on the x-axis of blue line which is the average of the returns and it's value is around 0(the corresponding y-value which is probability is around 20%). The graph below is the daily returns distribution graph. ![]() This time, the moving averages ranged from 50 days SMA to 200 days SMA. Every time there is a paradigm shift we can see the spike of the measurement line(brown line). The next graph here just uses another method to capture and confirm signal which is achieved by measuring the thickness of the ribbon. We can see that there is a ‘BUY’ signal around the announcement day since we can see the indicator line is building an upward momentum. In turn, if the distance metric line moves downward after a spike, it implies a ‘SELL’ signal. When there is a ‘BUY’ signal, the distance metrics line(yellow line) will show up a spike and the distance of the ribbon is at a relatively high level. Here the ribbon ranged from 25 days to 120 days) and I also use the hamming distance method (which you can find the detailed explanation from my previous article)to capture the signals when those ribbon lines come across and the regime shift. Reversals are confirmed when the averages crossover and head in the opposite direction. Whenever identifying all averages are moving in the same direction, you can judge that the trend is strong to some extent. I will use moving average ribbon(a technique used in technical analysis to identify the strength of the current trend and which is achieved by placing a large number of moving averages onto the same chart). The graph below is just to further clarify this trend. You can also choose to short the acquirer depending on the strategic value and investment timeline. Usually, people will long the company being acquired(pretty much always the smart move if the deal goes through). The target firms depict that the post-announcement returns are significantly greater than the pre-announcement returns, indicative of the immediate market reaction to this disclose information.īy the end of the article, I will also introduce how to find the arbitrage opportunity through an M&A event, M&A may be one of the few win-win situation if done properly. But their volumes are significantly higher than usual on the announcement date. Unlike the target firms, acquiring companies do not show significant differences and some negative returns across all the event windows. In general, across all the event windows, target firm’s stock price abnormal returns are significantly different from zero. ![]() The main topic of this article is about the public reaction towards M&A transactions after their respective announcements and its impact on the stock prices of the target and acquiring firms for both short-term and long-term period. A paired sample analysis for both target and acquiring companies has also been conducted by comparing the pre-announcement and post-announcement returns of their stock prices in the event window of ☓0 and ☒52 days for acquiring company only. Within last few years, the total number of M&As has stayed relatively stable. Moreover, we can find that the most popular years for M&As was in 1999, 2007, and 2015. The M&A value(orange line) and a total number(blue bar) of the M&As have their own cycles. We can see that the total number of M&As has increased over time(from the length of the bars and the dashed linear forecasting line above which shows the upward trend).
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