(2002), Arbelaez, Urrutia, and Abbas (2001), Chen, Firth, and Rui (2002). An excellent review of
these studies is provided in Kearney and Lucey (2004). Although the results of these analyses do
not always conform to each other, they predominantly testify in favor of increased degree of long
run market relationships worldwide.
All of the aforementioned studies utilize broad stock market indices to analyze long-run
market relations. As mentioned earlier, ETFs, by virtue of their very design and construction,
appear to be more suitable for examining equity market linkages. The next sub-section focuses on
the studies that considered closed-end country funds (CECFs) and iShares as instruments through
which international integration may be traced.
3.2. iShares, International Diversification and Long Run Relationships between Equity
Markets
One of the earliest studies using ETFs as diversification instruments was carried out by
Olienyk, Schwebach and Zumwalt (1999). They tested for cointegration and Granger causality
between SPDR and 17 WEBS and 12 respective country funds during 1996-1998. The authors
find a surprisingly unanimous result that SPDR is pair-wise cointegrated with every WEBS.
Cointegration is also found for WEBS and respective CECF. Furthermore, all 17 WEBS appear
to Granger cause SPDR, thus indicating presence of short-term inefficiencies. Thus Olienyk et al.
findings seem to suggest that there remains possibility of earning short run arbitrage profits using
WEBS and SPDRS, though only limited potential for diversification benefits from index-linked
securities in the long run.
Diversification benefits of iShares are also analysed in Pennathur, Delcoure and Anderson
(2002), Durand and Scott (2003), Miffre (2004), Schwebach, Olienyk, et al. (2002). Pennathur,
Delcoure and Anderson (2002) apply single- and two-factor models to the iShares prices for the