What is it about?
This study investigates the volatility spillovers between Special Purpose Acquisition Companies (SPACs) and a set of alternative instruments comprising traditional IPOs, merger arbitrage, hedge replication funds and equities, utilizing a time-varying spillover approach. Our empirical findings, based on high frequency dataset comprising 2,136 observations for the period 10/01/2020–06/08/2021, show that the level of volatility spillovers is moderate and consistent throughout the sample period. The SPAC market displays a relative neutral reaction within the channel of the diffused shocks, suggesting possible portfolio diversification gains for different types of investors.
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Why is it important?
Our contribution can be substantiated in three ways. To the best of our knowledge, this is the first study to investigate the connectedness of SPACs with other asset classes. SPACs, one of the rising trends in alternative investment circles, have never been tested in a time-varying parameter vector autoregressive spillover framework. Thus, our study seeks to produce new evidence con- cerning the reaction of alternative assets within a mechanism of transmitted spillovers. Second, although previous literature has focused on individual SPACs, we innovate by analyzing the behavior of SPACs by using the SPAC index, represented by Defiance Next Gen SPAC Derived ETF, which tracks the performance of U.S. SPACs. In this way, we gain exposure to a number of SPAC deals, while avoiding the risk of committing to one specific SPAC. We chose the aforementioned fund as it is the oldest fund in the market, with the largest market capitalization and its size being constantly on the rise.2 Finally, we analyze and document the behavior of SPACs by using a novel methodology approach (TVP-VAR), during a unique period for the financial markets, including the outbreak of the COVID-19 pandemic and the roll-out of vaccination procedures.
Perspectives
In this paper, we examine the connectedness between SPACs and various financial instruments considered as alternatives, such as traditional IPOs, merger arbitrage and hedge replication funds. We also incorporate equities within the system, in order to explore how alternative assets behave with regards to a traditional market. Based on the recent works of Balcilar et al. (2021), Papathanasiou et al. (2021), Samitas et al. (2021) and Zhang et al. (2021), the applied methodology comprehends the time-varying parameter vector autoregressive (TVP-VAR) method of Antonakakis et al. (2020), which improves the classical Diebold and Yilmaz (2012) approach. This approach surmounts certain limitations of the standard methodology, as it permits variances to alter over time and, thus, provides more robust estimates. In addition, the calibration of a random rolling-window width is not a prerequisite, since no rolling-window analysis is included, preserving in this way the utilization of all the accessible information. This is a great advantage in the case of SPACs due to the short span sample. In parallel, with the usage of intraday data for the period 10/01/2020–06/08/2021, our final sample includes 2,136 observations. Our empirical results will appeal to market participants and policy makers, as they indicate that SPACs remain relatively unaffected through the transmission mechanism of volatility spillovers and, thus, can form effective di- versifiers when added in a portfolio.
Dr Spyros Papathanasiou
National and Kapodistrian University of Athens
Read the Original
This page is a summary of: Novel alternative assets within a transmission mechanism of volatility spillovers: The role of SPACs, Finance Research Letters, June 2022, Elsevier,
DOI: 10.1016/j.frl.2021.102602.
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