31 Pages Posted: 20 Jan 2017 Last revised: 15 Sep 2017
Date Written: August 2017
Neutralizing portfolios from overall market risk is an important part of investment management particularly for hedge funds. In this paper we show an economically significant improvement in the accuracy of targeting market neutrality for equity portfolios. Key features of the approach are the relatively short forecast horizon of one week and forecasting with realized beta estimators computed using high quality, error corrected, intraday returns. We also find that too long and too short estimation windows result in poor beta forecasts and that the optimal length of estimation window depends on the frequency of return observations.
Keywords: Beta forecasting, portfolio optimization, short-horizon forecasting
JEL Classification: C53, G17
Suggested Citation: Suggested Citation
Lee, John B. and Reeves, Jonathan J. and Tjahja, Alice C. and Xie, Xuan, Targeting Market Neutrality (August 2017). UNSW Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=2901974 or http://dx.doi.org/10.2139/ssrn.2901974