Evaluating the Performance and the Trading Characteristics of Ishares
25 Pages Posted: 25 Nov 2006
This paper consists a comprehensive empirical research on iShares exchange traded funds performance and trading characteristics. At first, we investigate the ability of iShares to accurately replicate the performance of their underlying indexes, finding that there is a significant tracking error among iShares and indexes returns, especially for iShares that track the international capital indexes of Morgan Stanley. In parallel, we exhibit that iShares mainly trade at a premium from their net asset value. Further, we demonstrate that tracking error is also induced by the premium and the trading volume of iShares. Besides, we find that premium is affected positively by tracking error, while volume, which reflects the liquidity of iShares, is oppositely related to premium. Besides, we demonstrate that the lagged premium has sufficient predictive power on return, since performance is estimated to be negatively related to lagged premium. Finally, we provide very limited evidence that the volume is negatively related to the lagged premium and lagged return. In contrast volume is influenced strongly positively by the intraday price volatility of iShares.
Keywords: Performance, tracking error, premium, iShares
JEL Classification: G11, G15
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