Examining the dependence structure between carry trade and equity market returns in BRICS countries

Makhanya, Kabelo Collen and Bonga-Bonga, Lumengo and Manguzvane, Mathias Mandla (2023): Examining the dependence structure between carry trade and equity market returns in BRICS countries.

Abstract

This paper contributes to the literature on carry trade by investigating the dynamic correlation and the dependence structure between the US-dollar carry trade and equity markets in the BRICS economies during sample observations that include regular and crisis periods. Furthermore, the nonlinear Granger causality test based on the feed-forward neural networks (FFNN) model is used to assess how global volatility predicts the dynamic correlation between the US-dollar carry trade and equity markets in BRICS. The paper finds that the dynamic correlations between carry trade and equity markets in BRICS are more pronounced during most global crises. Moreover, the results of the SJC model showed that the lower tail dependence between the two series is higher during the various crises. Furthermore, the results of the empirical analysis show that global volatility predicts the dynamic correlations between carry trade and equity markets in BRICS only during crises. Asset managers and investors can benefit from this paper's findings regarding portfolio diversification, risk management, asset allocation, and hedging when dealing with equity assets and carry trades.

• Item Type: MPRA Paper
• Language: English
• Keywords: Carry trade, BRICS, dynamic conditional correlation, copula.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; F - International Economics > F3 - International Finance; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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