The relationship between carry trade and asset markets in South Africa

Maake, Tebogo and Bonga-Bonga, Lumengo (2019): The relationship between carry trade and asset markets in South Africa.

Abstract

This study investigates the link between the currency carry trade operations and asset markets in South Africa, namely the equity and bond markets. The carry trade operation examined in this paper involves two strategies, both of which use the South African rand as the investment currency, with the dollar and the Yen as the funding currencies in each strategy. This study uses the vector autoregressive BEKK- Generalised Autoregressive Conditional Heteroscedastic model in assessing volatility spillover between carry trade profit from each strategy and the South African equity and bond markets. The results of the empirical analysis show evidence of volatility spillover relationships between the carry trade returns and the two capital market returns. These relationships are dependent on the choice of the funding currency, with the dollar funded strategy more related with the bond market whilst the yen funded strategy is related with the equity market. This study’s findings emphasise the importance of volatility spillovers between the currency carry trade market and other asset markets in South Africa when assessing financial markets’ risks and formulating risk management policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: carry trade, yen, dollar, VAR-BEKK-GARCH
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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