Trade policy uncertainty and stock returns

Marcelo Bianconi, Federico Esposito and Marco Sammon

Journal of International Money and Finance, 2021, vol. 119, issue C

Abstract: A recent literature has documented large real effects of trade policy uncertainty (TPU) on trade, employment, and investment, but there is little evidence that investors are compensated for bearing such risk. To quantify the risk premium associated with TPU, we exploit quasi-experimental variation in exposure to TPU arising from Congressional votes to revoke China’s preferential tariff treatment between 1990 and 2001. A long-short portfolio designed to isolate exposure to TPU earns a risk-adjusted return of 3.6–6.2% per year. This effect is larger in sectors less protected from globalization, and more reliant on inputs from China. Industries more exposed to trade policy uncertainty also had a larger drop in stock prices when the uncertainty began, and more volatile returns around key policy dates. Our results are not explained by the effects of policy uncertainty on expected cash-flows, investors’ forecast errors, and import competition from China.

Keywords: Trade policy; Risk premium; Uncertainty; Tariff rates; Portfolio analysis (search for similar items in EconPapers)
JEL-codes: F1 F4 G1 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Trade Policy Uncertainty and Stock Returns (2020)
Working Paper: Trade Policy Uncertainty and Stock Returns (2020)
Working Paper: Trade Policy Uncertainty and Stock Returns (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:119:y:2021:i:c:s0261560621001431

DOI: 10.1016/j.jimonfin.2021.102492

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