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Currency Carry Trades and Stock Market Returns in Africa Abstract: Research Question: Is there a causal link between African currency targeted carry trades and the returns of their stock market indices? What is the nature of return volatility in carry trades and stock markets, and does volatility spillover exist between the two series in Africa? Motivation: The interactive and dynamic relationship between currency carry trade returns and stock market returns has not been communicated in exactitude, especially in emerging and frontier markets of Africa. This study explores the causal link between African currency carry trades and stock market returns. It also explores the dynamic relationship and volatility spillover between the currency carry trades and stock market returns. Idea: The primary idea is that there is conclusive evidence on the empirical failure of the uncovered interest rate parity (UIP) condition, and currency carry trades, which are investment/trading strategies, seek to exploit this failure. Data: Data on prices of stock market indices, interbank interest rates, and exchange rates between the target currencies and funding currencies of weekly periodicity sourced from DataStream, Quantic EasyData, and the central banks of the sampled countries are used. Method/Tools: The vector autoregressive (VAR) - Granger causality framework and the dynamic conditional correlationgeneralised autoregressive conditional heteroskedasticity (DCC-GARCH) estimation technique were employed in this study. Findings: The study finds evidence of causality running from carry trades to stock markets in 22 out of the 28 currency pairs studied, but not causality from stock markets to carry trades. Traces of volatility spillover could only be observed from carry trades to stock markets in 10 out of the 28 currency pairs studied. We conclude that the African currency carry trades drive their stock markets, that the conditional correlations between currency carry trades and stock market returns are dynamic and time-varying, and that there is high degree of persistence in African return volatility. Contributions: This study has made significant contribution to our knowledge on currency carry trades in Africa’s emerging and frontier markets. It has shown the interactive and dynamic relationships that exist between currency carry trade returns and the returns of stock market indices

Author

Listed:
  • Godfred Aawaar

    (Department of Accounting and Finance, KNUST School of Business, KNUST, Ghana.)

  • Eric Nkansah

    (Department of Banking Technology and Finance, Kumasi Technical University, Ghana.)

  • Irrshad Kaseeram

    (Faculty of Commerce, Administration and Law, University of Zululand, South Africa.)

Abstract

No abstract is available for this item.

Suggested Citation

  • Godfred Aawaar & Eric Nkansah & Irrshad Kaseeram, 2022. "Currency Carry Trades and Stock Market Returns in Africa Abstract: Research Question: Is there a causal link between African currency targeted carry trades and the returns of their stock market indice," Capital Markets Review, Malaysian Finance Association, vol. 30(1), pages 65-83.
    • Handle: RePEc:mfa:journl:v:30:y:2022:i:1:p:65-83
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    More about this item

    Keywords

    Carry trade; volatility spillover; African stock markets; DCCGARCH; Granger causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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