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Targeting market neutrality

Author

Listed:
  • John B. Lee
  • Jonathan J. Reeves
  • Alice C. Tjahja
  • Xuan Xie

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.

Suggested Citation

  • John B. Lee & Jonathan J. Reeves & Alice C. Tjahja & Xuan Xie, 2019. "Targeting market neutrality," Quantitative Finance, Taylor & Francis Journals, vol. 19(3), pages 437-451, March.
    • Handle: RePEc:taf:quantf:v:19:y:2019:i:3:p:437-451
    DOI: 10.1080/14697688.2018.1479066
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    Cited by:

    1. Doan, Bao & Lee, John B. & Liu, Qianqiu & Reeves, Jonathan J., 2022. "Beta measurement with high frequency returns," Finance Research Letters, Elsevier, vol. 47(PA).

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