Examining the Dependence Structure Between Carry Trade and Equity Market Returns in BRICS Economies

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 (Brazil, Russia, India, China and South Africa (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 assesses how global volatility predicts the dynamic correlation between the US-dollar carry trade and equity markets in BRICS. The paper finds the dynamic correlations between carry trade and equity markets in BRICS are more pronounced during most global crises. Moreover, the results of the symmetrised Joe Clayton (SJC) copula 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.

KEYWORDS:

• Carry trade
• stock markets
• BRICS
• VAR-DCC-GARCH model
• SJC copula model
• dynamic conditional correlations

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data Availability Statement

The data that support the findings of this study are available from the corresponding author, MM, upon reasonable request.

Notes

1 The choice and the order of the model is determined from Akaike Information Criteria.

Additional information

Notes on contributors

Kabelo Collen Makhanya

Kabelo Collen Makhanya is a recent Master's graduate of the University of Johannesburg and currently works as a senior economist at the National Treasury in South Africa.

Lumengo Bonga-Bonga

Professor Lumengo Bonga-Bonga is the head of research at the School of Economics, University of Johannesburg. Prof. Bonga Bonga is an experienced and highly rated researcher who specialises in International Finance and Financial Economics. Prof. Bonga Bonga has published in many highly ranked international journals and a lot of citations from his work.

Mathias Mandla Manguzvane

Dr. Mathias Mandla Manguzvane is a lecturer in the School of Economics at the University of Johannesburg. His research expertise is in the field of financial Economics. He has published in several internationally recognised journals.