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Are stock markets in Asia related to carry trade?

Author

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  • Fung, Hung-Gay
  • Tse, Yiuman
  • Zhao, Lin

Abstract

This study examines the relationship between carry trade returns and those of stock markets, using daily data from January 1995 to December 2011, and evaluates volatility spillover for the Japanese, Australian, Indian and Korean stock markets, in order to assess cross-market linkages. We have the following main results. First, we find significant causality in returns from carry trade to the Asian stock markets. These effects are mostly visible during the 2008 financial crisis and still persist after the crisis period. Second, there is bidirectional volatility spillover effect between the currency carry trade and Asian stocks. As the stock-to-carry spillover exists in most stock markets during financial crisis, the carry trade market takes the leading role in the cross-market information transmission during the post-crisis period. Third, the traditional view that carry trades make bets with borrowed money on small differences in interest rate markets does not appear to hold. Carry trades also participate in betting on economic fundamentals in recent years, as shown by the Japanese stock market with low interest rate.

Suggested Citation

  • Fung, Hung-Gay & Tse, Yiuman & Zhao, Lin, 2013. "Are stock markets in Asia related to carry trade?," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 200-216.
  • Handle: RePEc:eee:pacfin:v:25:y:2013:i:c:p:200-216
    DOI: 10.1016/j.pacfin.2013.08.010
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    Cited by:

    1. Makhanya, Kabelo Collen & Bonga-Bonga, Lumengo & Manguzvane, Mathias Mandla, 2023. "Examining the dependence structure between carry trade and equity market returns in BRICS countries," MPRA Paper 117461, University Library of Munich, Germany.
    2. Liu, Chih-Liang & Yang, Hsin-Feng, 2017. "Systemic risk in carry-trade portfolios," Finance Research Letters, Elsevier, vol. 20(C), pages 40-46.
    3. Lumengo Bonga-Bonga & Sefora Motena Rangoanana, 2022. "Carry Trade and Capital Market Returns in South Africa," JRFM, MDPI, vol. 15(11), pages 1-13, October.
    4. Miyakoshi, Tatsuyoshi & Shimada, Junji & Li, Kui-Wai, 2017. "The dynamic effects of quantitative easing on stock price: Evidence from Asian emerging markets, 2001–2016," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 548-567.
    5. Chan, Kam Fong & Chhagan, Mahesh & Marsden, Alastair, 2017. "Cross-border scheduled macroeconomic news impacts: Evidence from high-frequency Asia Pacific currencies," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 37-54.
    6. Chang‐Che Wu & MeiChi Huang & Chih‐Chiang Wu, 2021. "The role of asymmetry and dynamics in carry trade and general financial markets," The Financial Review, Eastern Finance Association, vol. 56(2), pages 331-353, May.
    7. Lumengo Bonga-Bonga & Tebogo Maake, 2021. "The Relationship between Carry Trade and Asset Markets in South Africa," JRFM, MDPI, vol. 14(7), pages 1-13, July.
    8. Kim, Suk-Joong, 2015. "Australian Dollar carry trades: Time varying probabilities and determinants," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 64-75.
    9. Wu, Chih-Chiang & Chen, Wei-Peng & Korsakul, Nattawadee, 2021. "Extreme linkages between foreign exchange and general financial markets," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Carry trade; Asian stock market; Causality; Volatility spillovers;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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