The US Reciprocal Tariff Announcement: An Analysis of Market Reactions

Caner Özdurak () and Pelin Yantur
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Caner Özdurak: Department of Economics, Faculty of Economics and Administrative Sciences, İstinye University, İstanbul 34396, Turkey
Pelin Yantur: Department of Political Science and International Relations, Faculty of Economics and Administrative Sciences, Yeni Yüzyıl University, İstanbul 34010, Turkey

JRFM, 2025, vol. 18, issue 10, 1-21

Abstract: This paper examines the high-frequency impact of tariff rhetoric on financial markets, a topic largely unexplored in existing literature. Unlike previous studies that focus on the long-term, macroeconomic effects of enacted trade policies, our research utilizes a novel, sentiment-based proxy variable for non-legislated tariff announcements. We demonstrate that political communication itself—not just formal policy changes—is a potent source of investor uncertainty and market volatility. Our analysis, employing a multi-model framework including VAR and EGARCH models, reveals several key findings. We find that trade-related shocks contribute significantly to market volatility by altering investor expectations and increasing perceived risk. A key discovery is a unique unidirectional causality where shocks to the S&P 500 preceded changes in our tariff variable, suggesting that market movements can influence policy rhetoric. Furthermore, our EGARCH analysis uncovers distinct volatility characteristics across asset classes, including an atypical positive asymmetry in the Chinese CSI 300. These results collectively provide robust empirical evidence that tariff rhetoric has a measurable and significant impact on asset prices and disproportionately increases market volatility, highlighting the need for policymakers to consider the financial market implications of their public statements.

Keywords: trade shocks; financial markets; tariffs; VAR; impulse response; news impact curves; EGARCH (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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