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Targeting Market Neutrality

31 Pages Posted: 20 Jan 2017 Last revised: 15 Sep 2017

John B. Lee

University of Auckland

Jonathan J. Reeves

UNSW Business School, University of New South Wales; Financial Research Network (FIRN)

Alice C. Tjahja

UNSW Australia Business School, School of Banking and Finance

Xuan Xie

Commonwealth Bank of Australia

Date Written: August 2017

Abstract

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

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

John Lee

University of Auckland ( email )

Private Bag 92019
Auckland, 1001
New Zealand
649 373 7599 ext. 85171 (Phone)
649 373 7406 (Fax)

Jonathan Reeves (Contact Author)

UNSW Business School, University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Alice Tjahja

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Xuan Xie

Commonwealth Bank of Australia ( email )

Sydney, NSW 2052
Australia

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