Modelling tail dependence structure between carry trade and BRICS markets: copula approach

Abstract

Carry trade and stock market interaction has been the central focus for many researchers and practitioners, especially with the increasing proliferation of these strategies. However, despite the growing interest, few are the studies that consider tail dependence structure in the financial analysis. This paper investigates the dependence structure between carry trade and BRICS markets using a time-varying copula model for the period 2006-2016. Empirical results demonstrate the presence of tail dependence in bear markets suggesting a large crash risk of the strategy. Moreover, BRICS markets are more likely to attract carry trades than developed markets. Finally, a particular high correlation was observed after the financial crisis indicating that carry trade is back and once again tends to target high interest rate countries, especially, Brazil, Russia and South Africa.