A currency preferential approach to international equity investment

Abstract

We propose a Timex strategy for reducing the foreign exchange risk associated with international equity investment, pertaining to countries with currencies correctly or undervalued by the standard of PPP. The performance of Timex is examined from the perspectives of eight developed nations with long histories of free-floating currencies. Based on the data from 1986:Q1 to 2014:Q4, we find unambiguous evidence for the superior performance of Timex in the foreign exchange market. Compared with the passive diversification strategy and the Morgan Stanley Capital International (MSCI) World index, Timex offers higher total returns and risk-adjusted total returns when rebalanced every 6 or 12 months for investors based in all eight countries under study. When rebalanced at a 3-year interval, Timex outperforms the passive diversification and the MSCI World index for five and all eight countries, respectively.