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

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.