Trade Policy Uncertainty and Stock Returns

41 Pages Posted: 14 Mar 2019 Last revised: 25 Mar 2019

Date Written: February 23, 2019

Abstract

This paper documents new stylized facts on the effects of trade policy uncertainty on stock returns. We exploit quasi-exogenous variation in exposure to policy uncertainty arising from annual votes by US Congress to revoke China's MFN tariff rates between 1990 and 2000. Before the uncertainty was resolved by granting China permanent MFN rates, US manufacturing industries highly exposed to trade policy uncertainty had stock returns 10.4% higher per year than less exposed sectors. We argue that this difference in average returns is a risk premium for exposure to trade policy uncertainty. Indirect exposure to trade policy uncertainty through Input-Output linkages also commands a substantial 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 (February 23, 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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