Trade Policy Uncertainty and Stock Returns
39 Pages Posted: 14 Mar 2019 Last revised: 23 Jul 2020
Date Written: July 22, 2020
We examine how trade policy uncertainty is reflected in stock returns. Our identification strategy exploits quasi-experimental variation in exposure to trade policy uncertainty arising from Congressional votes to revoke China's preferential tariff treatment between 1990 and 2001. More exposed industries commanded a risk premium of 6% per year. The risk premium was larger in sectors less protected from globalization, and more reliant on inputs from China. More exposed industries also had a larger drop in stock prices when the uncertainty began, and more volatile returns around key policy dates. Moreover, the effects of policy uncertainty on expected cash-flows, investors' forecast errors, and import competition from China cannot explain our results.
Keywords: trade policy, uncertainty, stock returns, risk premium
JEL Classification: F10, F13, G12
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