diverge much from the underlying NAV of constituent shares. Thus iShares present the U.S.
based investor with an opportunity to replicate the market portfolio of a foreign country without
the risk of selling it at a discount. Against this background, it is not surprising that iShares have
rapidly become an attractive alternative for investors seeking international equity exposure. As of
October 2004, well in excess of $150 billion has already been invested in these products
(indexfunds.com).
In view of the growing popularity of international iShares, the purpose of the present study
is to use iShares prices to measure the extent of equity market comovements. While numerous
studies have analyzed the issue of international equity market integration from an empirical
standpoint (see for example Phylatkis and Ravazzolo (2002), Gilmore and McManus (2002) and
Kearney and Lucey (2004), and the citations therein), most have used broad national stock
indices as proxies for equity markets in their analysis. It has been noted, however, that stock
market indices may not represent easily investible assets due to high costs of maintaining
equivalent portfolios and due to entry barriers for foreign investors existing in a number of
markets. The ETFs, on the other hand, appear to be more suitable for examining market linkages
since their exposure to entire markets and easiness of trade make them accessible to investors
with varying degrees of sophistication. From a technical point of view, iShares price series are
devoid of a number of problems such as non-synchronous trading, exchange rates fluctuations
and trading restrictions.
Despite the advantages of using iShares over national stock market indices, only a handful
of studies have used iShares as proxies for foreign equity markets so far, reflecting partly the
relative newness of some of these financial products. For example, see Miffre (2004), Phengpis
and Swanson (2004), Durand and Scott (2003), Pennathur, Delcoure and Anderson (2002),
Schwebach, Olienyk and Zumwalt (2002), Olienyk, Schwebach and Zumwalt (1999). In general,