The Effects of Trade War Risk on U.S. Financial Markets

31 Pages Posted: 18 Mar 2020

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: February 21, 2020

Abstract

This paper investigates the effects of trade war risk on various U.S. financial variables using a structural vector autoregression model identified by a heteroscedasticity-based approach. The empirical results indicate that increases in trade war risk cause declines in equity prices, Treasury yields and inflation expectations, a widening of BAA corporate spreads, a fall in the dollar against the yen, and rises in gold prices and stock market volatility. More importantly, we find that concerns about risks from the trade war may be overblown. Trade war risk shocks did not account for as large of a portion of the variances in the financial variables as expected over the sample period we consider, whose contribution was short-lived, quickly settling down to even smaller unconditional shares. Additional studies employing stock prices in the S&P 500 index to explore potential transmission channels show that firms with high input or output exposures to China’s market suffer significantly more from trade war risk.

Keywords: Trade war, Financial markets, Identification by heteroscedasticity, Vector autoregression

JEL Classification: C22, F10, G12

Suggested Citation

Chen, Yong and Fang, Jing and Liu, Dingming, The Effects of Trade War Risk on U.S. Financial Markets (February 21, 2020). 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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