Targeting Market Neutrality and Volatility

Abstract

Advances in volatility and beta forecasting are extended to the setting of volatility timing of market neutral portfolios. Key features of the study include short horizon forecasting from models with higher accuracy levels than previously documented in the literature. A trade-off in the joint targeting of portfolio beta and volatility is also identified and appropriate balancing of these two dimensions of risk is demonstrated.

Keywords: beta forecasting, short-horizon forecasting, volatility forecasting, volatility timing, zero-beta portfolios

JEL Classification: C53, G17