Quantile dependencies between exchange rate volatility and sectoral stock returns in South Africa

This study assesses the effect of USD-Rand exchange rate volatility on South African sectoral stock returns between 29 March 1996 and 28 July 2022. Using the quantile-on-quantile regression (QQR) technique, we uncover that, although each of the sectors exhibit important idiosyncrasies, there exists a single overarching relationship between exchange rate volatility and stock returns that persists across all sectors. We find that low levels of volatility in the exchange rate have a negative impact on stock returns. Conversely, high levels of exchange rate volatility have a positive impact on stock returns. The most important implication of the findings of this study is that investors should have a keen awareness of movements in both the exchange rate and stock markets.