Do forward exchange rate conditions intervene with the transmission of stock market volatility and COVID-19 impact? Sign and location-based asymmetries

This study is the first to estimate the differential impact of bearish, bullish, and moderate quantiles of stock market volatility (SV) and COVID-19 case counts on the forward exchange rates (FERs) in South Asia—specifically, those of Pakistan, India, Sri-Lanka, and Bangladesh over 3-, 6-, 9-, and 12-month periods using an augmented QARDL model. Prior research has focused on the portfolio balance effect in transmitting financial market shocks to spot-based foreign exchange markets, largely overlooking the role of SV and FERs across different quantiles and investment horizons (short- and long-term). The findings confirm the presence of both sign- and location-based asymmetries in the transmission process of shocks from SV to FERs. For South Asian businesses involved in international trade, it is essential to consider these varying short- and long-term effects of stock market volatility across quantiles of FERs. This understanding underscores the need for a more nuanced investment approach and is vital for making informed decisions regarding hedging strategies, pricing, and the management of currency risk in cross-border transactions.