9.32 25:1: How Five "Diversified" Election Bets Blow Up on One Shock
Five "diversified" state-election arb positions share one national driver. Correlation 0.75 hides tail dependence 0.90, so a single shock turns a ±$0.10 book into a -$2.50 loss: a 25:1 ratio, not 5:1.
You hold arbitrage positions in five separate state-election markets. Five different states, five independent-looking books, and a spreadsheet that says your correlation is a comfortable 0.75. You call it diversified and size each position like it is one of five roughly independent bets. Then a national result lands, one number that moves every state at once, and the five positions go down together in a single afternoon. The loss is not five times a normal wobble. It is twenty-five times it. The diversification you priced in was never there, and this article works out exactly where it went.
The full treatment of copulas and how to fit a Student-t dependence structure lives in the article "Correlation Lies; Tail Dependence Tells the Truth: Student-t Copulas for Election Portfolios." Here the scope is one worked blowup and the single quantity that predicts it.