Trade Policy Uncertainty and Stock Returns

39 Pages Posted: 14 Mar 2019 Last revised: 23 Sep 2021

See all articles by Marcelo Bianconi

Marcelo Bianconi

Tufts University - Department of Economics

Federico Esposito

Tufts University - Department of Economics

Marco Sammon

Harvard Business School

Date Written: September 22, 2021

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, uncertainty, stock returns, risk premium

JEL Classification: F10, F13, G12

Suggested Citation

Bianconi, Marcelo and Esposito, Federico and Sammon, Marco, Trade Policy Uncertainty and Stock Returns (September 22, 2021). Journal of International Money and Finance, Vol. 119, 2021, Available at SSRN: https://ssrn.com/abstract=3340700 or http://dx.doi.org/10.2139/ssrn.3340700

Marcelo Bianconi

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-2677 (Phone)

HOME PAGE: http://www.tufts.edu/~mbiancon

Federico Esposito (Contact Author)

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

Marco Sammon

Harvard Business School ( email )

Boston, MA 02163
United States

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