Abstract
M.Com. (Financial Economics)
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 the degree of volatility spillover between carry trade profit from each of the funding currencies and the South African equity and bond markets. The results of the empirical analysis show 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.