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

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.