Safety-first and extreme value bilateral U.S.-Mexican portfolio optimization around the peso crisis and NAFTA in 1994

摘要

High volatility can motivate safety-first portfolio optimization in emerging markets. Mexico is a case in point, as the December 1994 Mexico peso crisis followed the high positive expectations from the ratification of NAFTA earlier that year. This study examines safety-first and extreme value optimization for bilateral U.S.-Mexican portfolios in U.S. dollar (USD) and Mexican peso (MXN) around the crisis, and compares these to Markowitz mean-variance optimization. It finds that these approaches result in substantial differences for the optimal investment weights in Mexico, with these generally higher under safety-first pre-1994 and lower post-1994 than under mean-variance optimization, whether in MXN or USD. Safety-first objectives do not inhibit investment weights that are higher than the minimum variance optimization weights for Mexico in the non-crises pre-1994 period. But following the 1994 financial crisis, safety-first optimization requires more of an exit from Mexico than even minimum variance optimization.