Abstract
This study examines the non-linear relationship between exchange rate movements and stock returns in developed and emerging markets, focusing on how interest rate and inflation differentials with the United States moderate this dynamic. Using a panel smooth transition regression model, the analysis covers a crisis period from 2019 to 2021, capturing the unique financial shocks of the COVID-19 pandemic and its impact on global financial markets. Additionally, a quantile treatment effect analysis compares stock return responses across different quantiles for a panel of thirty countries from 2015Q1 to 2022Q4, examining both unconditional effects and conditional effects with controls for macroeconomic variables. The findings reveal significant non-linearities, with emerging markets showing greater sensitivity to exchange rate depreciations under high-interest or inflation differentials, negatively impacting stock returns. Conversely, developed markets demonstrate more resilience, particularly under moderate economic disparities. Policy implications suggest that emerging market policymakers should prioritise exchange rate stability to mitigate stock market volatility, while investors are encouraged to consider hedging and diversification strategies.