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Betas and the myth of market neutrality

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  • Papageorgiou, Nicolas
  • Reeves, Jonathan J.
  • Xie, Xuan

Abstract

Market neutral funds are commonly advertised as alternative investments that offer returns which are uncorrelated with the broad market. Utilizing recent advances in financial econometrics, we demonstrate that using standard forecasting methods to construct market (beta) neutral funds is often very inaccurate. Our findings demonstrate that the econometric methods that are commonly employed for forecasting the beta (systematic) risk typically lack sufficient accuracy to permit the successful construction of market neutral portfolios. The results in this paper also highlight the need for higher frequency returns data to be utilized more commonly. Using daily returns over the past year, we demonstrate an approach that is easy to implement and delivers a substantial improvement, relative to other methods, when attempting to construct a market neutral portfolio.

Suggested Citation

  • Papageorgiou, Nicolas & Reeves, Jonathan J. & Xie, Xuan, 2016. "Betas and the myth of market neutrality," International Journal of Forecasting, Elsevier, vol. 32(2), pages 548-558.
    • Handle: RePEc:eee:intfor:v:32:y:2016:i:2:p:548-558
    DOI: 10.1016/j.ijforecast.2015.09.005
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    References listed on IDEAS

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    Cited by:

    1. Tolga Cenesizoglu & Denada Ibrushi, 2020. "Predicting Systematic Risk With Macroeconomic And Financial Variables," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 649-673, August.
    2. Guglielmo Maria Caporale & Luis A. Gil-Alana & Miguel Martin-Valmayor, 2020. "Persistence in the Realized Betas: Some Evidence for the Spanish Stock Market," CESifo Working Paper Series 8171, CESifo.
    3. Doan, Bao & Lee, John B. & Liu, Qianqiu & Reeves, Jonathan J., 2022. "Beta measurement with high frequency returns," Finance Research Letters, Elsevier, vol. 47(PA).
    4. Cenesizoglu, Tolga & de Oliveira Ferrazoli Ribeiro, Fabio & Reeves, Jonathan J., 2017. "Beta forecasting at long horizons," International Journal of Forecasting, Elsevier, vol. 33(4), pages 936-957.

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