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Do Words Hurt More Than Actions? The Impact of Trade Tensions on Financial Markets

Massimo Ferrari Minesso (), Frederik Kurcz and Maria Sole Pagliari

Working papers from Banque de France

Abstract: In this paper, we apply textual analysis and machine learning algorithms to construct an index capturing trade tensions between US and China. Our indicator matches well-known events in the US-China trade dispute and is exogenous to the developments on global financial markets. By means of local projection methods, we show that US markets are largely unaffected by rising trade tensions, with the exception of those firms that are more exposed to China, while the same shock negatively affects stock market indices in EMEs and China. Higher trade tensions also entail: i) an appreciation of the US dollar; ii) a depreciation of EMEs currencies; iii) muted changes in safe haven currencies; iv) portfolio re-balancing between stocks and bonds in the EMEs. We also show that trade tensions account for around 15% of the variance of Chinese stocks while their contribution is muted for US markets. These findings suggest that the US-China trade tensions are interpreted as a negative demand shock for the Chinese economy rather than as a global risk shock.

Keywords: Trade Shocks; Machine Learning; Stock Indexes; Exchange Rates. (search for similar items in EconPapers)
JEL-codes: C55 D53 E44 F13 F14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021
New Economics Papers: this item is included in nep-big, nep-cmp, nep-cna and nep-cwa
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