Carry trade and capital market returns in South Africa

This paper assesses the extent to which carry trade operations affect the performance of equity and bond markets in a target country, South Africa, by considering the US and euro area as the funding countries. A two- and three-factor capital asset pricing model (CAPM) is employed to assess whether the pricing of equity and bond markets in South Africa depends on the US dollar/rand and euro/rand carry trade returns. Moreover, the study makes use of quantile regression technique to assess whether this pricing varies with the distribution of the carry trade returns. 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