31 Pages Posted: 20 Jan 2017 Last revised: 1 Feb 2017
Date Written: October 19, 2016
Neutralizing portfolios from overall market risk is an important issue in 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 frequency data provided by QuantQuote. 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, systematic risk, zero-beta portfolios
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 (October 19, 2016). Available at SSRN: https://ssrn.com/abstract=2901974 or http://dx.doi.org/10.2139/ssrn.2901974