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Working Papers

Hedging Network Structure and Portfolio Diversification
(with Silvia Mayoral and David Moreno)

The following figure is an example of a hedging network of stocks in NYSE. Each node is a stock and each line is hedging relation between two stocks. The blue link represent positive hedging and a red link is negative hedging.

In this paper, we investigate how the structure of this network influence our diversification strategy. We find interesting results. We show that a full hedging network struture is beneficial when the hedging is negative while when there is positive hedging, a diversification strategy can be catasrophic. Moreover, in assymetrical structures, the hedging network plays a mild role in determining the diversification benefits.

The conclusion is "before you diversify, take a good look at this network."