Asset allocation with portfolio immunization strategies based on community detection

In this contribution we introduce a new approach for optimal asset allocation, proposing a strategy that combines equity-, commodity-, and bond index- futures, and that controls the risk propagation amongst markets. In particular, we revisit traditional portfolio allocation approaches to take into account the role of systemic risk, based on the implementation of an immunization policy, which involves identifying critical communities of assets to manage the spread of financial contagion: by safeguarding these critical assets, the exposure to financial instability or systemic collapses can be managed, ensuring better returns or higher resilience. Our contribution is focused on improving asset allocation approaches by taking into account inter-dependencies amongst assets: we pursue this goal by identifying a network of assets showing a community structure, and by proposing subsequently investment rules based on the role of the identified communities, that are detected based on a proxy of systemic risk, to determine different exposure profiles. Results show that the community structure is a significant determinant of risk-returns profiles, and that peripheral communities of assets tend to outperform the more central and interdependent ones.