Dynamic Relationships between iShares and Country Funds: The Case of Europe and Asia

Abstract

This study investigates whether country effects or regional effects are prominent in iShares and country funds that trade in the US. iShares and country funds from three European and three Asian countries are investigated for possible long run and short-run relationships among iShares and country funds of each country and among regional iShares and among regional country funds. Johansen’s methodology is used to investigate long-run relationships, while vector autoregression is used to detect short-term effects. It is found that for both regions, iShares and country funds are related to their country counterparts but not to their regional counterparts in the short run. The reverse is true in the long run, with relationships among regional counterparts but not among country counterparts. These findings support the hypothesis that country effects are prominent in the short-run and regional effects take over in the long run.