The Effects of Trump's Trade War on U.S. Financial Markets

57 Pages Posted: 18 Mar 2020 Last revised: 13 Aug 2021

See all articles by Yong Chen

Yong Chen

affiliation not provided to SSRN

Jing Fang

Huazhong University of Science and Technology (Formerly Tongi Medical University) - School of Economics

Dingming Liu

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: August 12, 2021

Abstract

Existing studies usually investigate the effects of Trump’s trade war on U.S. financial markets by the event-study method. We take an alternative approach by integrating trade war-related news into one single "trade war shock" based on a structural vector autoregression model identified via event day heteroscedasticity and then exploring its effect on various financial variables. We find that the identified trade war shocks consist of both growth news shocks and risk premium shocks. The former reflects shocks to investors’ cash-flow expectations, and the latter arises from shifts in the risk appetite or changes in the cash-flow uncertainty, both of which not only generates significant impacts on financial variables such as stock prices, treasury yields, and BAA corporate bond spreads but also explains a sizable fraction of their fluctuations. Additional analyses that employ stock prices in the S&P 500 index to explore the role of firms’ global value chain exposure during the trade war show that firms with high output exposure to China’s market suffer significantly more from the trade war, while input exposure does not cause a persistent significant difference.

Keywords: Trade war, Financial markets, Identification by heteroscedasticity, Global value chain

JEL Classification: C22, F10, G12

Suggested Citation

Chen, Yong and Fang, Jing and Liu, Dingming, The Effects of Trump's Trade War on U.S. Financial Markets (August 12, 2021). Available at SSRN: https://ssrn.com/abstract=3542130 or http://dx.doi.org/10.2139/ssrn.3542130

Yong Chen

affiliation not provided to SSRN

Jing Fang

Huazhong University of Science and Technology (Formerly Tongi Medical University) - School of Economics ( email )

Wuhan, Hubei 430074
China

Dingming Liu (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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