IDEAS home Printed from https://ideas.repec.org/a/sae/emffin/v9y2010i2p171-197.html
   My bibliography  Save this article

US-Thailand Bilateral Safety-first Portfolio Optimisation around the 1997 Asian Financial Crisis

Author

Listed:
  • Mahfuzul Haque

    (Mahfuzul Haque (corresponding author), Associate Professor of Finance, College of Business, Indiana State University, Terre Haute, IN 47809. E-mail: mhaque@isugw.indstate.edu)

  • Oscar Varela

    (Oscar Varela, Charles R. and Dorothy S. Carter Chair in Business Administration, Professor of Finance, Department of Economics and Finance, 500 W. University Avenue, University of Texas at El Paso, El Paso, TX 79968. E-mail: ovarela3@utep.edu)

Abstract

We examine bilateral US- and Thailand-based equity portfolios around the 1997 baht crisis using an extreme value framework for safety-first (SF) portfolio optimisation, with comparisons to the Markowitz mean-variance minimum variance portfolio (MVP). The optimal SF portfolio is invested 100 per cent in the US regardless of the periods considered when returns are denominated in USD, but 80 per cent in the US in the post-crisis period when returns are denominated in THB. The MVP for USD denominations is 85 per cent invested in the US regardless of the period, in contrast to 100 per cent for SF, suggesting more investment in the US when USD returns and safety considerations are paramount. In contrast, there are minimal differences between the MVP and SF for THB denominations, particularly post crisis when there are no differences. The baht crisis seems to have shifted investments toward the US for those with an interest in safety first and USD returns, but had minimal effect on the portfolio composition for those with an interest in THB returns.

Suggested Citation

  • Mahfuzul Haque & Oscar Varela, 2010. "US-Thailand Bilateral Safety-first Portfolio Optimisation around the 1997 Asian Financial Crisis," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 171-197, August.
    • Handle: RePEc:sae:emffin:v:9:y:2010:i:2:p:171-197
    DOI: 10.1177/097265271000900203
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/097265271000900203
    Download Restriction: no
    File URL: https://libkey.io/10.1177/097265271000900203?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Gencay, Ramazan & Selcuk, Faruk, 2004. "Extreme value theory and Value-at-Risk: Relative performance in emerging markets," International Journal of Forecasting, Elsevier, vol. 20(2), pages 287-303.
    2. Gande, Amar & John, Kose & Senbet, Lemma W., 2008. "Bank incentives, economic specialization, and financial crises in emerging economies," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 707-732, September.
    3. Haque, Mahfuzul & Varela, Oscar & Hassan, M. Kabir, 2007. "Safety-first and extreme value bilateral U.S.-Mexican portfolio optimization around the peso crisis and NAFTA in 1994," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 449-469, July.
    4. Jansen, Dennis W. & Koedijk, Kees G. & de Vries, Casper G., 2000. "Portfolio selection with limited downside risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 247-269, November.
    5. Karolyi, G. Andrew, 2002. "Did the Asian financial crisis scare foreign investors out of Japan?," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 411-442, September.
    6. Younes Bensalah, 2002. "Asset Allocation Using Extreme Value Theory," Staff Working Papers 02-2, Bank of Canada.
    7. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
    8. Kar‐yiu Wong & Richard Y. K. Ho, 2002. "The Asian Crisis, 1997," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 1-1, February.
    9. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 459-472, November.
    10. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
    11. Ike Mathur & Kimberly C. Gleason & Selahattin Dibooglu & Manohar Singh, 2002. "Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks," The Financial Review, Eastern Finance Association, vol. 37(1), pages 17-33, February.
    12. W. Jansen Dennis, 2001. "Limited Downside Risk In Portfolio Selection Among U.S. and Pacific Basin Equities," International Economic Journal, Taylor & Francis Journals, vol. 15(4), pages 1-39.
    13. Arzac, Enrique R. & Bawa, Vijay S., 1977. "Portfolio choice and equilibrium in capital markets with safety-first investors," Journal of Financial Economics, Elsevier, vol. 4(3), pages 277-288, May.
    14. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    15. Choudhry, Taufiq, 2005. "Time-varying beta and the Asian financial crisis: Evidence from Malaysian and Taiwanese firms," Pacific-Basin Finance Journal, Elsevier, vol. 13(1), pages 93-118, January.
    16. Hall, Peter, 1990. "Using the bootstrap to estimate mean squared error and select smoothing parameter in nonparametric problems," Journal of Multivariate Analysis, Elsevier, vol. 32(2), pages 177-203, February.
    17. Haque, Mahfuzul & Kabir Hassan, M. & Varela, Oscar, 2004. "Safety-first portfolio optimization for US investors in emerging global, Asian and Latin American markets," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 91-116, January.
    18. Gabriel Palma, 2001. "Three-and-a-half Cycles of ‘Mania, Panic, and [Asymmetric] Crash’: East Asia and Latin America Compared," Palgrave Macmillan Books, in: Ha-Joon Chang & Gabriel Palma & D. Hugh Whittaker (ed.), Financial Liberalization and the Asian Crisis, chapter 15, pages 254-286, Palgrave Macmillan.
    19. Bera, Anil K. & Jarque, Carlos M., 1981. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals : Monte Carlo Evidence," Economics Letters, Elsevier, vol. 7(4), pages 313-318.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
    2. Haque, Mahfuzul & Varela, Oscar & Hassan, M. Kabir, 2007. "Safety-first and extreme value bilateral U.S.-Mexican portfolio optimization around the peso crisis and NAFTA in 1994," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 449-469, July.
    3. DiTraglia, Francis J. & Gerlach, Jeffrey R., 2013. "Portfolio selection: An extreme value approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 305-323.
    4. González-Sánchez, Mariano & Nave Pineda, Juan M., 2023. "Where is the distribution tail threshold? A tale on tail and copulas in financial risk measurement," International Review of Financial Analysis, Elsevier, vol. 86(C).
    5. Dias, Alexandra, 2014. "Semiparametric estimation of multi-asset portfolio tail risk," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 398-408.
    6. Haque, Mahfuzul & Kabir Hassan, M. & Varela, Oscar, 2004. "Safety-first portfolio optimization for US investors in emerging global, Asian and Latin American markets," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 91-116, January.
    7. Brendan Bradley & Murad Taqqu, 2004. "Asset allocation when guarding against catastrophic losses: a comparison between the structure variable and joint probability methods," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 619-636.
    8. Huang, Wei & Liu, Qianqiu & Ghon Rhee, S. & Wu, Feng, 2012. "Extreme downside risk and expected stock returns," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1492-1502.
    9. Quatto, Piero & Vacca, Gianmarco & Zoia, Maria Grazia, 2021. "A new copula for modeling portfolios with skewed, leptokurtic and high-order dependent risk factors," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    10. Zhou, Chen, 2010. "Dependence structure of risk factors and diversification effects," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 531-540, June.
    11. Hammoudeh, Shawkat & Araújo Santos, Paulo & Al-Hassan, Abdullah, 2013. "Downside risk management and VaR-based optimal portfolios for precious metals, oil and stocks," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 318-334.
    12. Iwatsubo, Kentaro & Watkins, Clinton, 2021. "The changing role of foreign investors in Tokyo stock price formation," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    13. Tong, Bin & Diao, Xundi & Wu, Chongfeng, 2015. "Modeling asymmetric and dynamic dependence of overnight and daytime returns: An empirical evidence from China Banking Sector," Economic Modelling, Elsevier, vol. 51(C), pages 366-382.
    14. Dias, Alexandra, 2016. "The economic value of controlling for large losses in portfolio selection," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 81-91.
    15. Tong, Bin & Wu, Chongfeng & Zhou, Chunyang, 2013. "Modeling the co-movements between crude oil and refined petroleum markets," Energy Economics, Elsevier, vol. 40(C), pages 882-897.
    16. Chen Zou, 2009. "Dependence structure of risk factors and diversification effects," DNB Working Papers 219, Netherlands Central Bank, Research Department.
    17. Pompeo Della Posta, 2002. "Modelli di crisi valutarie e misure di politica economica," Moneta e Credito, Economia civile, vol. 55(219), pages 237-262.
    18. Rhee, S. Ghon & Wu, Feng (Harry), 2020. "Conditional extreme risk, black swan hedging, and asset prices," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 412-435.
    19. Diego Nicolas López, 2006. "Crisis De Mercados De Bonos Emergentes Y Contagio: Dependencia Extrema," Documentos CEDE 2243, Universidad de los Andes, Facultad de Economía, CEDE.
    20. Dimitrakopoulos, Dimitris N. & Kavussanos, Manolis G. & Spyrou, Spyros I., 2010. "Value at risk models for volatile emerging markets equity portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 515-526, November.

    More about this item

    Keywords

    JEL Classification: G11 Portfolio Choice; Investment Decisions; JEL Classification: G15 International Financial Markets; JEL Classification: F37 International Finance; Portfolio optimisation; safety-first; extreme-value; emerging markets; financial crisis; risk management;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:emffin:v:9:y:2010:i:2:p:171-197. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ifmr.ac.in .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.