Abstract
This study assesses the extent to which carry trade operations affect the performance of equity and bond markets in a target country by considering the US and euro area as the funding countries and South Africa as the target country. The study further investigates the extent of the US dollar/rand carry trade and the euro/rand carry trade pricing on the South African equity and bond markets. The study uses a two- and three-factor capital asset pricing model (CAPM). Moreover, in order to assess whether the pricing of equity and bond markets in South Africa varies with the distribution of the US dollar/rand and euro/rand carry trade returns, the study makes use of quantile regression technique. The findings support the fact that the US dollar/rand and euro/rand carry trades are important factors for the pricing of equity and bond markets in South Africa. Moreover, for the equity market, specifically, the pricing depends on the different market conditions, especially the distribution of the two carry trade excess returns. However, in the bond market, carry trade contributes to the pricing of the bond market only in extreme tails or bear market.
M.Com. (Financial Economics)