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Handling Mergers and Delistings in Equity Backtests

Article Quant Q&A · Author: Hairy Ass
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Summary

The document explains why equity backtests need to account for corporate actions that remove or transform a stock. A strategy may buy a company that later merges, delists, or is acquired, so a historical price series alone may not say how the position should be closed. The answer recommends incorporating splits, mergers, delisting events, and their terms into the simulation, using public company or index announcements where available.

For an announced cash acquisition, the stated example describes how the offer price can affect trading before the delisting date and how a model that sees only rising prices may buy without understanding the transaction. The source notes that event data may be inconsistent, sometimes appearing in documents that require manual processing, especially for smaller firms. It does not give a general rule for every delisting outcome or quantify backtest bias; cash offers, stock exchanges, failed deals, and other cases require their specific terms and reliable historical data.

Key ideas

  • Backtests should account for splits, mergers, and delistings to represent the fate of held positions.
  • Corporate action terms can determine the consideration received when a company leaves the market.
  • Price-only strategies may miss announced transaction terms that affect the stock’s trading path.
  • Corporate action data may come from index or company announcements and can require manual processing.
  • The correct treatment varies with the specific event and its terms.

Tags

EquitiesBacktestingEvent-driven
Full text
# Dealing with delisting during backtesting


# Dealing with delisting during backtesting












I tried to do simulation as accurate as possible because my life will depend on it. I looked at backtesting results and I found that there were situations that the program bought stocks but it disappeared when I tried to sell it. Sometimes they merged with other company. Sometimes they just delisted for some other reasons.

What is the most accurate way to simulate such situation ? To understand what should happen, how is the price determined when I try to sell delisted stock in real life ?

## Answer by user43629 (score 1)

https://quant.stackexchange.com/a/50196

Your models must be Split, merge & Delist Aware. That is the only way you can solve this problem.

When a company announces a merger/delisting date, it's often after seeking Shareholders approval, which often will be approved by the nation/authority. If not, the company will be criticized for misleading shareholders. So the news often is reliable and doesn't change.

If a company, whose shares are trading at say 100 USD announces a delisting date at a price of say 150 USD. All the market makers will be onto it as the stake is going to provide 50$ (Guaranteed/Risk-Free Return) on the delisting date, from their purchase date.

If you look at the above company data through your models, all models just consider it as an optimistic situation as the prices are rising consistently and they do the buying. Sometimes, the price would even exceed the buyback price, which is an opportunity to sell. But the models wouldn't be aware of such information.

The only way of doing it is to make the models aware of the splits, mergers and delistings. This information is public and could be processed. It is expensive, complex but this is the only way to go forward.

The information is provided by the respective indices. For NasDaq Its here, NDAQ Press Releases by Company For LSE, LSE Press Releases For DAX, DAX Press Releases For ASX, ASX Press Releases For NSE, NSE Press releases You should be able to find this information from the respective indices, if the index isn't mentioned above.

The data could be very specific [depending on the index]. Some indices just upload the pdf or file received from the companies. In such a case, you might have to manually process the information. Often, this wouldn't be the case, if you are validating top companies of an index. For micro/mid/small cap, this could be a problem.

The Index maintains the information of those companies, which are delisted too. However it might be provided in a different sub section. you might make a note of this.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.