U.S. TRADE POLICY UNCERTAINTY AND EXPECTED STOCK RETURNS OF CHINESE LISTED COMPANIES

Yuexiang Jiang, Yiming Dai, Huaigang Long and Yanjian Zhu
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Yuexiang Jiang: School of Economics, Zhejiang University, Hangzhou, P. R. China
Yiming Dai: School of Economics, Zhejiang University, Hangzhou, P. R. China
Huaigang Long: School of Economics, Zhejiang University, Hangzhou, P. R. China
Yanjian Zhu: School of Economics, Zhejiang University, Hangzhou, P. R. China

The Singapore Economic Review (SER), 2025, vol. 70, issue 02, 343-366

Abstract: Our study is the first to examine the pricing effect of U.S. trade policy uncertainty (TPU) on Chinese stocks. We estimate the U.S. TPU beta, which measures Chinese stock exposure to the U.S. TPU index. Both portfolio analyses and cross-sectional regressions suggest a significantly negative relation between the U.S. TPU beta and expected returns, which cannot be explained by other pricing factors. The stocks in the lowest U.S. TPU beta quintile can generate 3.48% higher annual returns compared to stocks in the highest U.S. TPU beta quintile. Furthermore, we provide two potential mechanisms that include a real economy channel and a behavioral finance channel using vector autoregression models. Our results indicate that the negative premium can be explained by both demanding more of high TPU beta stocks in hedging against adverse effects from TPU and selling more of low TPU beta stocks due to pessimistic beliefs of noise trader.

Keywords: U.S. trade policy uncertainty; Chinese stock market; return predictability; asset pricing; vector autoregression models (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S0217590821500235

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