Trade Policy Uncertainty and Stock Returns

46 Pages Posted: 14 Mar 2019 Last revised: 30 Jul 2019

Date Written: July 29, 2019

Abstract

This paper documents new stylized facts on the effects of trade policy uncertainty on stock returns. We exploit quasi-experimental variation in exposure to policy uncertainty arising from annual votes by Congress to revoke China's NTR tariff rates between 1990 and 2001. Before China was permanently granted NTR rates, US manufacturing industries more exposed to trade policy uncertainty had stock returns 4.3% higher per year than less exposed sectors. Our results are not driven by stock prices' responses to policy-related news, nor by the effect of Chinese competition on expected or realized returns. We argue instead that this difference in average returns is a risk premium for exposure to trade policy uncertainty. Moreover, we document that more exposed sectors had more volatile stock prices, and that indirect exposure to uncertainty through Input-Output linkages also commanded a risk premium.

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 (July 29, 2019). 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

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://marcosammon.com/

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