diagram, 41
specific, 44, 46
Risk arbitrage mechanics, 139–150
capital structure, 139
corporate events, 139
deal process, 141–142
deal spread, 145–147
history of risk arbitrage, 140–141
quantitative aspects, 149
trading strategy, 147–149
transaction terms, 142–145
collars, 145
fixed ratio stock exchange, 144
fixed value stock exchange, 144
stock and cash exchange, 144–145
Risk arbitrage pairs, 8, 9
Risk management, 184–186
Risk neutral probabilities, 172
Risk on portfolio, calculating, 44–47
r-squared measure, 105
Ross, Stephen A., 39
Rubbermaid Corporation, 180S
Score/distance measure, 86–87
Securities and Exchange Commission
(SEC), 142
Security market line (SML), 3–4
Selling short, 166–167
Sensitivity analysis, 50
Sequus Pharmaceuticals, 198
Shannon, Claude E., 179
Sharpe, William T., 3
Sharpe ratio calculations, 136
Short sale, 151–152
indicator, 154
Signal-to-noise ratio (SNR), 98, 104,
113, 119, 136
Single-step model, 175–177
Specific risk, 44, 46
Specific spread, 92–93
Specific variance matrix, 42
Spinoffs, 139
Sports Authority (TSA), 181
Spread, 8, 74, 80, 118
deal, 145–147
dynamics, 118, 122–128valve, 153
volatility, 185
Spread inversion, 189–199
applications to trading, 197–199
applying Kalman filter, 193–194
model selection, 194–197
observation equation, 192–193
prediction equation, 190–192
Spurious regression, 105
Standard & Poor (S&P) index, 64–67
Stationarity of integrated specific
returns, 97
Stationary time series, 79
Statistical arbitrage pairs, 8, 9
trading, history of, 73–74
Statistical factor models, 38
Stock, James H., 77, 79, 104
Stock and cash exchange, 144–145
Stock prices, modeling, 30–32
System state transition, 53T
Target firm, 142
Target stock, 144
Target stock quantity, 154
Tartaglia, Nunzio, 73, 74
Technical analysis, 53, 54, 198
Tender offer, 139–140
Threshold level, 128
Threshold value, 127
Tikhonov-Miller regularization, 132
Time-based stops, 136
Time series, 14–36
autocorrelation, 15
correlogram, 15
defined, 15
defined, 14
forecasting, 24–25
goodness of fit vs. bias, 25–26
model choice, 26–29
modeling stock prices, 30–32
time series models, 16–24
autoregressive process (AR),
19–21
general ARMA process, 21–22
moving average process (MA),
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