Downside Risk Constraints and Currency Hedging in International Portfolios: the Asian and Late-2000 Crisis

• Main Author: Zhou, Ying
• Other Authors: Jinnai, Ryo
• Format: Others
• Language: en_US
• Published: 2012
• Subjects: Safety First; Mean Variance; Hedging; Extreme Value Theory; Portfolio Selection
• Online Access: http://hdl.handle.net/1969.1/ETD-TAMU-2010-12-8974

MV is the traditional method to treat international portfolio selection problems, which bases its theory on the assumption of Normal Distribution. However, during economy recession the portfolio return turns out to be a fat tail distribution. Therefore, in this sense, we explore Roy’s SF criterion and apply the extreme theory to the historical data. We demonstrate how such portfolios would perform during the Asian Crisis, IT Bubble Bust and the Financial Crisis separately. We also compare the SF portfolio’s performance to the MV portfolio’s performance, therefore to check, SF and MV portfolio, which will outperform during bust and boom of the economy. The Asian Crisis was marked with great currency devaluation and lower currency return on equity. The Dot.Com Bubble Busts was known for its sharp plummet in the stock market, while, the Financial Crisis was known as the large falls in the US stock market and elsewhere. They are the extreme events of the world capital markets, which in some way contribute to the non-normal distribution. Simulated results over the 1997-2010 period which include six busts and booms: the Asian Crisis, period after Asian Crisis, IT Bubble Bust, period after IT Bubble Bust, The Financial Crisis and period after The Financial Crisis, indicate that SF portfolio outperforms MV portfolio during most of the times, this result is especially obvious for Indonesian and Thailand.