International Diversification through iShares and Their Rivals

Journal of Risk, Vol.19, 2017

42 Pages Posted: 16 Aug 2016 Last revised: 24 Jan 2017

See all articles by Jie Cao

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Rao Fu

Chinese University of Hong Kong - Department of Decision Sciences & Managerial Economics

Yong Jin

The Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: August 13, 2016

Abstract

This paper examines the diversification benefits of iShares in comparison to closed-end country funds (CECFs) and American Depository Receipts (ADRs) between April 1996 and December 2013. iShares are country-specific exchange traded funds that track specific Morgan Stanley Capital International (MSCI) country indices and thus are expected to provide superior diversification gains than their rivals. The main findings are: first, although all of these financial instruments exhibit significant exposure to U.S. market, they retain significant exposure to their home markets and provide important diversification benefits. Second, mean-variance spanning and Sharpe ratio test results provide strong evidence that iShares can neither outperform nor replace CECFs and ADRs for international diversification. Finally, a combination of these domestically traded securities could exhaust the gains from unattainable direct foreign investment.

Keywords: International Diversification, Mean Variance Spanning Tests, Exchange Traded Funds, Closed-End Country Funds, ADRs

JEL Classification: G11, G15

Suggested Citation

Cao, Jie and Fu, Rao and Jin, Yong, International Diversification through iShares and Their Rivals (August 13, 2016). Journal of Risk, Vol.19, 2017. Available at SSRN: https://ssrn.com/abstract=2822640

Jie Cao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

HOME PAGE: http://sites.google.com/site/jiejaycao

Rao Fu

Chinese University of Hong Kong - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

Yong Jin

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hong Kong

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