Information processing with mergers and acquisitions: modeling and empirical analysis of option prices and trade

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A consistent option pricing model is very important for market participants and risk-management systems. Within the financial press, mergers and acquisitions (M&A) are a major topic; the press is particularly interested in value generation and predictions about their success; a model-based extraction of these parameters from market data should be of great interest. Beyond this, analyzing trade provides indications about appropriate modeling approaches in finance: if an opinion based modeling approach (limited rationality of investors) improves the quality of predictions, then this is a strong indication to favor this approach over models of information asymmetries (fully rational investors).There are two major gaps in M&A research: first, a missing pricing model for options in M&A; second, an integrated equilibrium model of trading and pricing based on differences of opinion. The proposed research project shall study these two gaps in two consecutive phases.The project has multiple goals. First, it shall develop further existing pricing and trading models. These models shall then be used to extract unobservable fundamental parameters (value generation, success probability) in M&A; for this, appropriate numerical techniques will be developed. Finally, the project shall study if options lead to significant improvements in the predictions of the derived fundamental parameters; these empirical studies will mostly use classic statistical techniques (descriptive statistics and regressions).