Using a hedging network to minimize portfolio risk

This paper develops a useful tool based on hedging networks that allows portfolio managers to allocate capital so as to build portfolios with low risk. We apply a popular measure from the network literature, the Katz centrality measure, to summarize how a security relates to other securities in the network (hedging relations) and to itself (unhedgeable component). We generate empirical evidence that picking stocks with the lowest value of the Katz centrality measure leads to portfolios with a low variance. We show that these portfolios achieve lower variance than other classical portfolio strategies, both in-sample and out-of-sample.

Using a hedging network to minimize portfolio risk Articles