Asymmetric Volatility Spillovers in Varying Market Conditions and Portfolio Performance Analysis of the South African Foreign Exchange Market

This paper investigates the dynamics of volatility spillovers in the South African foreign exchange market across calm and crisis periods, with particular attention paid to the pre- and post-COVID-19 eras. Employing daily exchange rate returns from 2015 to 2025, we apply a Quantile Vector Autoregression (QVAR) model to uncover asymmetries in spillover transmission across the distribution of returns. We evaluate the implications of these spillovers for portfolio performance under three canonical strategies: risk parity, tangency, and naïve equal-weighting. Our findings indicate that the COVID-19 shock intensified volatility spillovers and exacerbated their asymmetry, especially in the lower tail, while the pre-COVID period portrayed higher volatility compared to the post-COVID period under calm market conditions. While risk-based strategies dominate in tranquil markets, equal-weighted portfolios exhibit superior downside resilience under stress, although they ignore risk exposure. These results underscore the importance of accounting for tail-risk-driven interconnectedness in portfolio construction and risk management. This study contributes to the growing literature on volatility spillovers and offers practical insights for managing currency exposure in emerging markets under nonlinear dependence structures.