The Beta Neutral Model with Leverage Effect
27 Pages Posted: 28 Aug 2017
Date Written: May 30, 2017
We present a beta neutral model that includes the leverage effect to allow hedge fund managers to target a near-zero beta for market neutral strategies. For this purpose, we derive a metric of correlation with leverage effect to identify the fine relation between the market beta and volatility changes. An empirical test based on the most popular market neutral strategies is run from 2000 to 2015 with exhaustive data sets including 600 American stocks and 600 European stocks from the S&P 500, Nasdaq 100, and Euro Stoxx 600. Our findings confirm the ability of the beta neutral model to withdraw an important part of the bias from the market neutral strategies.
Keywords: Beta, Correlation, Volatility, Portfolio Management, Market Neutral Strategies
JEL Classification: C5, G01, G11, G12, G32
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