Discussion of Risk Exposures and International Diversification: Evidence from iShares

In their paper Zhong and Yang (2005) examine the risk exposure of iShares. These funds, which are traded on the major exchanges in the US, are designed to track a wide variety of indices. The iShares studied in this paper are those which track the MSCI indices of a foreign country, and are therefore of interest to US investors seeking international diversification. The main question addressed by the authors is whether the iShare price, quoted on the US exchange, closely mimics the corresponding MSCI country index, or whether significant deviations exist. The underlying concern is whether iShares provide US investors with 100 percent exposure to a foreign country index or whether these exchange traded funds contain a substantial component of US-specific risk. The price movements of iShares on the US market may differ from the MSCI index for two main reasons. Firstly, the underlying assets of the fund are close but not exactly equal to the constituent assets of the MSCI index. Pennathur, Delcoure and Anderson (2002) report that approximately 95% of the assets of iShare funds correspond to the underlying benchmark MSCI index. Although the authors do not explicitly address this issue the results from Section 3 (ii) suggest that deviations resulting from this effect