Abstract
This study investigates the relationship between the US dollar carry trade and the equity market of the BRICS1 economies, using daily data from 03 January 2000 to 30 June 2021. The study employed the Vector Autoregressive Dynamic Conditional Correlation GARCH (VAR-DCC-GARCH) model to assess the dynamic conditional correlation between the carry trade and stock market returns of the BRICS economies. Furthermore, the study employed the time-varying symmetrized Joe-Clayton (SJC) copula model, owing to its ability to capture both lower and upper tail dependencies, to assess the tail dependence between the carry trade and stock market returns of BRICS economies. To supplement the analysis, the study also employed the nonlinear Granger causality test to assess the impact of the global volatility index on the dynamic correlation between the carry trade and stock returns of the BRICS economies. The study finds that the dynamic conditional correlations are positive for all BRICS economies and were more pronounced during the 2008 global financial crisis. The results from the SJC copula model show that the time-varying conditional correlations between the carry trade returns and stock returns for BRICS are higher on the lower tail compared to the upper tail. The result from the nonlinear Granger causality test shows that a relationship exists between the global volatility index (VIX index) and the conditional correlation between the carry trade return and stock returns of the BRICS economies. The policymakers in the BRICS economies should aim for a much higher interest rate differential to protect the value of their currency, attract carry trade investors, and boost the stock markets during crisis periods.
Keywords: Carry trade, stock markets, BRICS, VAR-DCC-GARCH model, SJC copula model, dynamic conditional correlations, VIX index.