Are performance based arbitrage effects detectable? Evidence from merger arbitrage

This paper examines the predictions of the performance based arbitrage hypothesis for the merger arbitrage market. Performance based arbitrage [Shleifer, A., Vishny, R.W., 1997. The limits of arbitrage. Journal of Finance, 52 (1), 35-55] is the notion that funds under management are withdrawn from arbitrageurs following trading losses, resulting in inefficient prices for securities subject to arbitrage trades. I examine general comovement in merger arbitrage spreads and the response of spreads to large arbitrage losses and substantial changes in deal flow. I find little evidence that merger arbitrage spreads exhibit systematic comovement or are substantially affected by important liquidity events in this market.