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Publications in 2009

Markov-switching in target stocks during takeover bids

Author: Gelman S., Wilfling B.

Journal of Empirical Finance. 16 (2009), pp.745–758

The paper examines shifts in the market betas and the conditional volatility of stock prices of takeover targets. Using daily stock prices of five European and American targets, we find that adequately specified Markov-switching GARCH models are capable of detecting statistically regime-switches in all takeover deal-types (in cash bids, pure share-exchange bids, mixed bids). In particular, conditional volatility regime-switches are found to be most clear-cut for cash bids. Our economic findings have implications for a broad range of financial applications such as the valuation of target stock options.

JEL classification: C32; C52; G12; G14; G34

Keywords: Takeover bids; Stock price dynamics; Markov-switching models

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