Re-assessing co-movements among G7 equity markets: evidence from iShares

Barari, Mahua, Lucey, Brian M. and Voronkova, Svitlana (2006) Re-assessing co-movements among G7 equity markets: evidence from iShares. UNSPECIFIED. Manchester Metropolitan University. ISSN 1478-8209

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Abstract

iShares funds are products designed to mimic the movements of MSCI stock market indices. Being devoid of problems associated with trading restrictions, exchange-rate fluctuations and non-synchronous trading, iShares data are better suited for measuring, firstly, equity-market co-movements and, secondly, diversification potential than national indices data; the latter data are used by most of the studies in the area. Applying recent time-varying methodology for the analysis of short- and long-term co-movements, a detailed analysis of the dynamics of the equity market linkages over the period 1996-2005 is provided. Evidence is found of increasing conditional correlations and significant time-varying long-run relationships between the US and the majority of other G7 markets since 2001, as measured by iShares. However, the extent of both short-term and long-term linkages between the G7 equity markets is lower for national indices data. Our findings suggest that (i) the results of earlier studies that are based on stock market indices should be interpreted with caution, since using these may overestimate the extent of available diversification benefits; and (ii) iShares funds do not represent perfect diversification products. These results appear to be robust to alternative model specifications, data frequency and conditioning bias.