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B. H. Doan, D. Jayasuriya, J. B. Lee, W. C. Lo, and J. J. Reeves: Neutralizing Market Risk with Backward and Forward Looking Betas

December 5, 2025

In this paper we provide advances in the methodology of market neutral portfolio management through utilizing both backward and forward looking betas. Backward looking betas are computed from realized beta estimators with high frequency stock returns and forward looking betas are computed from option prices. Forecast combinations of both backward and forward looking betas are utilized in the portfolio management and we find improvements in the accuracy and robustness of targeting zero beta portfolios through this methodology, relative to standard approaches in practice. Economically significant improvements are demonstrated particularly during the volatility of the global financial crisis of 2008 and 2009.

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